This is a guest post by Vivek Wadhwa, an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Executive in Residence at Duke University. Follow him on Twitter at @vwadhwa.
Back in 1986, when Bill Gates was still making sales calls, he pitched my group at First Boston on why we should bet the farm on Windows. Despite the risk involved, we gave his fledgling startup the deal. This wasn’t because of his financial backers (he didn’t even drop any names), but because we believed in his vision and nerdiness. In the same way, Google became a huge success long before the deep pocketed VC’s arrived to ride Larry and Sergey’s coattails. They simply had a great technology and winning strategy.
So I’m miffed by the National Venture Capital Association’s (NVCA) claim that companies like Microsoft and Google “…would not exist today without the funding and guidance provided during their early stages by venture capitalists.” And I’m amused that the NVCA claims credit for creating 12 million jobs and generating $3 trillion in revenue (that’s only 21 percent of U.S. GDP). In the software industry (which includes Internet/Web 2.0), they stake claim to 81% of the all jobs created. Yes, 81%. Can they please give the entrepreneurs who risk their life savings, max out their credit cards and put their families in the back seat a little more credit? We’re not talking about divvying up the company’s stock here, just a pat on the back.
How’d they come up with these numbers? They added up all the revenue generated in 2008 by any company a venture capitalist ever invested a dime in. So if John Doerr bought Bill a lunch in 1985, they’d count Microsoft as part of their empire. Maybe I’m exaggerating a bit. But seriously, the NVCA numbers aren’t even remotely credible. How can VCs claim credit for the revenue of a company which they cashed out of twenty or thirty years ago? And even then, claiming credit for 81% of tech jobs and 21% of GDP? More to the point, would those jobs never have been created if the VCs had never appeared on the scene? How can the NVCA prove causality?
The answer is, the NVCA can prove nothing and a growing pool of data suggests that VCs at best have little to no impact on these companies and at worst have a negative impact. I just completed a research project in which we interviewed the founders of 549 successful companies in several high-growth industries – the ones VC’s are most likely to fund. We selected companies that had made it out of the garage and were generating real revenue. Guess what? Hardly ten percent of the serial entrepreneurs took venture money in their first startups. In their subsequent launches, the proportion who took venture money went up to a quarter. In other words, three-quarters of even the most experienced entrepreneurs didn’t rely on venture capital (new report to be released in October).
NVCA claims that VCs created entire industries like biotech and turned the software development and semiconductor industries “…into prime drivers of the U.S. economy.” I am a big fan of Vinod Khosla’s and believe he is a real pioneer. But he is the exception rather than the rule. The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.
The correlation between venture capital investments and productivity growth was researched by Masako Ueda, a professor at University of Wisconsin-Madison. She analyzed total factor productivity (or TFP, which is a measure of innovation) in several industries. She found that VC investment actually lagged behind TFP growth by two years and later rounds of VC investments actually caused a decline in TFP. In other words, venture capital slowed down the innovation process. What’s more she found that delayed TFP growth is correlated with first round VC investment. In simple English, this means that money goes where the innovation is, not the other way around.
The NVCA report also touts all sorts of statistics about how their investments outperformed the overall economy. But this isn’t what Kauffman Foundation’s Paul Kedrosky found when he researched the Inc. 500 list of the fastest-growing private companies. His study determined that from 1997-2007 venture industry lagged the small-cap Russell 2000 Index by 10 percent (this includes returns from the dot-com hey-days). What’s more the study found that only 16 percent of these 900 companies had venture capital backing. And less than 1 percent of the 600,000 new employer businesses created in the United States every year obtain venture capital financing.
What’s behind the NVCA’s voodoo economics? Even though they vehemently deny it, VCs are looking for bailout money and tax-breaks. After spending so much time, energy and breath in the past decade arguing that government subsidies distort markets, now the wealthy, bloated VC community wants its own handouts.
My VC friends complain over drinks about a new breed of VCs who are crowding out the really smart and experienced. These gold digger VCs bear MBAs and have no real operational experience but plenty of taste for IPOs. (Interestingly, if they don’t have an MBA, they have a law degree. Go figure.) With all this dumb VC money sloshing through the system, VCs end up funding hordes of “me-too” companies. This leads to declining returns and high startup failure rates. Everyone loses.
What we need to do is to apply the same rules to VC’s which they impose on their companies – force them to make tough choices and get their business models in order. And instead of giving the tax-breaks to the middlemen, let’s give these directly to the entrepreneurs who take the risks and create the innovation. It is the entrepreneurs who fuel the economy, not the venture capitalists or investment bankers.
I agree. Great analysis. VCs are more parasites than catalysts…
Why Vivek’s Posts Rock
Quite simple … he has perfected the art of framebreaking insight (unlike the other writers who simply rehash what is reported by someone else.)
What is the art of framebreaking insight?
It has three parts:
1. Conventional wisdom suggests that X
2. However, deeper analysis and intellectual insight suggests Y
3. And this is what it means for you and how you should act as a result
Vivek needs to start his own think tank … his posts are much too good for TC
VCs have brainwashed aspiring entrepreneurs into thinking that Step-1 in starting a company is to kiss their butts.
Good to see posts like Vivek’s that set the record straight.
They look more conservative, stodgy, and low-risk everyday. Don’t we have banks for this?
Excellent, Excellent, Excellent. Great to see someone have the courage to say things the way they are. All we get fed is the VC propoganda!
You have to understand no one is a god here, we all make choices so do VC’s… dont blame VC’s for lack of new ideas.
Hope you were on TC50…do you think even with billion dollar charity money some of these ideas could come up?
We are all in the same boat…VC’s are not drug pushers nor are entrepreneurs addicts.
They do have some role to play else they wont exist.
Great article. For once someone has called the VC’s little “oh we make things happen” game. True that _some_ VCs actually help their companies – most simply milk a startup for it’s portfolio potential.
As a lifelong Entrepreneur turned VC I share many of the views here. Particularly that there are few VC’s that are innovators or have operational experience. However the same can be said for Entrepreneurs. How many YouTube knock-offs are out there? Many have gotten funded. Some may actually figure out how to make UGC a pure-play business.
The examples of building successful businesses without Venture Capital are mostly in software where start-up costs are negligible. But hardware, Biotech, Pharma, and Cleantech are very capitale intensive businesses. The only Entrepreneures who can bootstrap here are those who have had huge successful exits and are willing to risk their personal wealth for a new passion.
Like anything it is an 20/80 rule. There are Great VCs and great Entrepreneurs and then there are the rest.
Like everything else right now the VC industry is being changed by the economy. It is likely to emerge much smaller and with the smartest surviving. And the result is that Entrepreneurs who DO need capital to will have do do better than walking in with a sexy Powerpoint and the biz plan “we’ll figure out how to make money later.”
Your still talking in tunnel vision. You assume the entreprenuer has funds in the first place. What if they do indeed have a great huge return idea? given the traditional due diligence and homework stuff.
google norman dodd. this provides a document about the Reese commission which had reports of findings bought so the public wouldnt know.
http://www.hydrojet-e.com
click on the inventor button
Apparently you have never heard of Hewlett Packard or Varian Associates, some of the many high-tech hardware companies that didn’t receive VC funding.
At the last MIT Venture Capital conference, a speaker brilliantly described the good and bad about VC money:
“Venture capital is like sex. When it’s good, it’s really good. When it’s bad, it’s still good.”
“When it’s good, it’s really good. When it’s bad, it’s still good.”
With the all-important corollary: “At the time; before the emotional fall-out and that niggling feeling that you were used…”
Kudos for this great facts.
Excellent article…eye opener for many VC job seekers…
what about cultivating innovation in the USA? really at the fundamental level. especially for ideas that require funding and dont have it. I argue VCs cant see past next week. Further, they cant determine feasibility. The staus quo has plagued the elementary foundations.
google Norman Dodd.
go to http://www.hydrojet-e.com and click on the inventor button
Excellent analysis Vivek.
Single handily the best post I’ve read in 2009.
This is reality and there is so much truth here. Personally, I’ve started a tech company and raised nearly $30M in VC money and can tell you I will never do that again. Yes, I will raise money from VC’s only when I want personal liquidity for my hard earned work.
To any aspiring first time entrepreneurs out there. If you’re seeking some capital for growth I’d highly recommend this new breed of Super Angels firms. They understand the pain, suffering and real challenges your going through.
Yeah – I call BS on this angels hype… most angels around today are as hard work to get through the funding cycle as VCs, put their money in at a much lower valuation, and you’ll still need a growth round later from a VC.
There are a handful of high value angels but fewer of them than there are decent VC firms… and if you’re out pitching or have done any pitching this year, most angel groups are little more than sewing circles that get together and gossip regularly over drinks while some hapless entrepreneur tries to pitch in the background.
Most VC hating on TechCrunch comes from those who don’t get far with VCs. It’s natural to feel the frustration of VC rejection, and you can bitch about it or you can learn from it and build a better startup next time round. But you’ll get better questions and more knowledgeable input from most VC pitches than you will most angel pitches.
Now, if you’re not doing your homework, finding the best VCs and working your network to get to them and instead spraying pitches out at any VC who’ll give you an hour, then you’re not going to have much luck…
Angels are the new VCs. The Sand Hill Road crowd and anyone who emulates them have long since retired into the institutional category. They’re not doing “ventures” anymore, that’s just part of their name. They’re on the boards of major corporations, you know, like bankers.
Excellent and proved with facts and figures ….too good. VC invest as they see profits.You can check my site. Its full of people creative ideas. Its the idea and the courage to implement it that makes the all difference. You can always get investors but investors cant always say that they can always get good startups. No doubt VC helps in the growth but its a mutual relationship
Hooray for Vivek!
what we learned from his posts so far:
1. older entrepreneur are better than young
2. US work visa policy sucks
3. VC have no real contribution
not the average ideas, are they?
and yes, VC actually kills productivity, by introducing endless meetings, never ending term sheets negotiations, hours on excel spreadsheets trying to figure out complex valuations/dilutions models etc.
Vivek should get a weekly insight column here. what his next insight?
So the obvious conclusion to this is that the Government should replace the VC industry and reap the benefit directly in the form of an exit rather than a tax. Put the VCs out of business, let LPs go the the race track for their 10x returns and watch the economy flourish with young, strong companies as entrepreneurial risk taking is rewarded once again.
This is not a bad idea! Government would be looking to fund projects that really prove to be what people need instead of wasting billions on useless projects just for the sake of jobs. Taxes would be cut, and everything, including employment, would be more productive!
Ooof – public option government VC. I’m otta here
ok, but is it really that surpising that vc’s invest where the innovation is?
what would silicon valley be if it didnt have access to such copious amounts of seed funding and growth capital?
for me the seed funding is the vital factor, and so maybe that is more down to angels, but i wonder how big microsoft, google, amazon etc would have been if they hadnt had access to growth funding?
can you imagine tesla being able to have been started in any other region of america let alone anywhere else in the world? ino it was the paypal owner who started the company with his own money, but its the propesity to invest thats important
You miss the point of the article. It’s “vcs invest where the innovation is”. It is, they invest mostly in in innovations where the successful outcome is already clear.
I agree, of course thats how they invest the majority of their funds. considering that they have to raise money from institutional investors to have any money to invest. it makes sense that the majority of their investments are in things that they expect to be home runs, rather than those that could be home runs if a market develops.
but my point was, what would the valley be without the massive concentration of investment there? fine, the VCs might not have participated in the riskiest proof of concept stages, but those companies that got to a stage of requiring series A funding, probably arent calling VCs parasites.
speaking as an entrepreneur from the other side of the pond, i would be thrilled if say sequoia, were even to open a field office in the same country as me!)
Quoted from above:
“Interestingly, if they don’t have an MBA, they have a law degree. Go figure.”
I do go figure. All the better to take advantage of and rip off the entrepreneur.
Simple.
Brilliant! I couldn’t agree more. It’s good to know I’m not a lone voice. It never ceases to amaze me how much importance is given to VCs in the tech industry. Innovation and value of a company is not based on how much VC money is pumped. In fact, often times hype created by these VC dollars ultimately cause crash as was the case with dot-com bubble. Innovations come from entrepreneurs and they should be given the break, not the VCs.
I like to see an analysis regarding angels and their contribution to company formation and job creation.
It is true that the claims made by VCs are not realistic and vastly exaggerated. But, at the same time, we cannot forget that they have played key role in many innovative fields. By its very nature, a Venture Capitalist will invest only in a new promising project where he can hope to earn a handsome profit. There is nothing wrong in a VC selectively investing in projects. After all, we have to appreciate that for every one grand success, a VC may have seen 9 failures losing his money invested in projects which could not lead to big money. So, you have to judge the role of VCs also by their failed projects. Who would like to invest in a project which is likely to fail? Yet, it is a fact that a big percentage of projected financed by VCs fail. Does it not show the high risk involved in what VCs do? This being the position, what is wrong if they are selective in financing the projects? Therefore, the author’s observations “The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.” are not fully justified.
What about their failed projects? Did they not smell blood? Then why did they invest? Why did they fail then?
Unfortunately, the author has tried to present one-sided story without taking into consideration the problems which VCs might be facing.
Of course, at the cost of repetition, I would say that the tall claims made by the VCs are also not correct. To conclude, it is neither black nor white; it is some shade of grey. Truth lies somewhere in between the two extremes.
“By its very nature, a Venture Capitalist will invest only in a new promising project where he can hope to earn a handsome profit. There is nothing wrong in a VC selectively investing in projects”
But one of the author’s main points is that VC’s do not (typically) create innovation and predominantly seek profit instead. Seeking profit is not wrong, but by your very own quote above a VC’s primary motivation is antithetical to fostering innovation because fostering innovation means taking a risk on something bold and new. A risky yet innovative project and a project selected primarily for it’s potential for returns are two vastly different kinds of investments. This is because the only way to create a model for potential returns that has any basis in reality is to use previous results which means you are inherently basing your analysis on what has already been done before.
Innovation is inherent in VC. If it is an established project with no risk involved or with no innovation, one can even hope for capital financing from the regular channels. VCs step in only because there is high risk and the normal banking channels won’t invest. So, it cannot be said that VCs don’t invest in innovation. The experience reveals that many innovative projects have in fact been financed by VCs. Ultimately, VCs are not running any charity organizations. They are in business and for that matter, a business which is highly risky. So, naturally, they have to see the scope for profitability also. Investing in a highly risky project which is not established yet and which is in an unknown or not-so-established-concept is nothing but investing in an innovative project. The fact that 9 out of 10 VC-funded projects fail to produce good results for the VCs proves this point. Innovation does not mean that every time you must end with some new patent(s). It may also be an innovation in the way of doing things or doing business or just a new idea. Every idea is not patentable.
In any case, my only objection was to the author taking only one side. I have nowhere stated that the VCs are angels. The fact remains that they are ultimately in the business with the intention of making money. They are not scientists or researchers.
Thanks, Roberts.
Ashok,
“So, it cannot be said that VCs don’t invest in innovation”
You make several good points but there’s a matter of degree here. The author is not saying that VC’s never invest in innovation, but that they predominantly don’t and instead focus the majority of their energies on “me-too” companies.
“The fact that 9 out of 10 VC-funded projects fail to produce good results for the VCs proves this point.”
That’s actually not a good data point for proving that VC’s invest in innovation. In fact it can be used with equal efficacy as a fairly dramatic piece of evidence that they do in fact invest in too many “me-too” companies. A proven market axiom is that in any application market segment, only a tiny percentage of players will ultimately succeed and will be profitable. Flooding your VC portfolio with companies of the “me-too” type would easily lead to an equivalent high portfolio failure rate. Without knowing the mix of a VC’s portfolio of companies the failure rate is not necessarily evidence of a VC’s tendency to invest in innovative companies, only ones that don’t perform.
I agree that it is a question of degree. But I don’t think the fact that 9 out of 10 VC funded projects fail could point either to prove that these projects were “me-too” type projects. As far as I understand there is no independent research on this aspect. So, your guess could be as wild as mine.
I have to reply up here AShok because there is no reply button on your post. I guess TechCrunch has a “nested reply” limit.
> “So, your guess could be as wild as mine.”
That’s exactly my point. You stated that the high failure rate was clear evidence of VC’s taking risks on innovative projects. I replied saying that is it was not, that instead, it was inconclusive and could be interpreted either way. Towards supporting the premise that the high failure rate indicated the selection of innovative projects or towards the selection of me-too companies. That’s why I pointed out that there is no way to know which way the arrow points without knowing the exact mix of the VC’s portfolio. In fact that’s the very last sentence in my reply.
Hitting a little white ball moving 90 miles an hour, with a three inch piece of wood to a spot no one can catch it an then running 90 feet before someone can throw that ball at you is 3 times easier than picking a winner if you’re a VC. Yet the pay is about the same. This suggests the VC is over paid by 200% for his value add…
Phil (Couldn’t reply directly due to nesting limit)…
Bad math. Even if someone would grant you that you’re comparing apples to apples on the probabilities, you need to take into account the number of people who want or can do the job to translate it into a salary. According to your logic there are simply less people who can do the job of venture investing vs. hitting a fastball.
VCs aren’t taking any risks, they’re just exceptionally bad at what they do.
They’re well connected, well funded, and uninformed. They are the institutional investors. Banks don’t loan money to businesses, not beyond a small business loan, and that requires your house for collateral.
VCs lose on 9 out of 10 investments because they invest in 9 YouTube clones, 7 of which only exist in a powerpoint presentation and excel spreasheet. They make up for it by being the gatesway so that original YouTube has to go through them, even for an acquisition. The aren’t even any good at pump and dump hyping anymore.
The examples the author provides lead this article are just flat out wrong.
In 1986, MSFT was not a “fledgling startup” — it was an 11 year old company with ~$200MM in revenues, 1000 employees, that had just been IPO’ed at a $500MM market cap. (See http://www.wire...12/redmond.html)
Similarly, Google was NOT “a huge success long before the deep pocketed VC’s arrived to ride Larry and Sergey’s coattails.”
KP and Sequioa invested in June 1999 — less than a year after the company founded. A promising startup, with no revenues, is a much more accurate description.
http://www.wire...12/redmond.html
correct link for google history:
http://www.goog...te/history.html
No, when Microsoft went public, it was a $90 million company. What investment bank would bet their future on an operating system built by a startup like this in the days when IBM ruled?
Your MS link doesn’t work either. In the words of Joe Wilson, you lie! or Kanye West, I’mma let you finish but Vivek’s claims are a bit more credible at this point.
Excerpt from several similar Microsoft history pieces:
1986
New Campus March 13, Motivated by a desire to provide value to an increasing number of employee shareholders, Microsoft stock goes public at $21.00 per share, rising to $28.00 per share by the end of the first trading day. Initial public offering raises $61 million.
Arjun, thanks for letting me finish.
Sorry for the typo in the MSFT link. Here is the correct version:
http://www.wire...12/redmond.html
You are correct that the IPO raised $61MM. This figure reflects the ~3.1M shares traded in the IPO.
My comment referred to the market cap of $500M. The market cap is the total value of the company, calculated on all the 24.7M shares outstanding (including BillG’s 45% ownership stake, and Paul Allen’s 25% ownership stake). This is comfortably above $500M, depending on which stock price you use (i.e. initial pricing, first trade, or initial daily close)
More on the MSFT IPO at:
http://blog.sea...ives/102018.asp
Now, how do you feel? Trying to be the smart guy and ending up being completely wrong.
I have no problem with being shown that there is more to it than I thought. I don’t think a little humor hurt anyone.
The shark analogy is so true and also explains the influx of “new breed” VCs. Success not only breeds success, it also attracts carpetbaggers and leeches that eventually short-circuit the whole system.
Meanwhile, “old breed” VCs move to other variations of early capital investment and idea incubation, under new names and processes.
How do you think Angel Investors compare? Being that they invest earlier and in smaller increments, I expect their correlation to TFP to be closer than VCs.
Another contributor to the ineffectiveness of VCs is the ever-increasing amounts of money involved. With more money to burn, sacrifices lessen and with that, altruism also declines. Selfishness increases, bringing destructive motives and behaviors, clouding vision, and inhibiting creativity, success and happiness for everyone.
This is yet another counter-argument to NVCA’s claim. If they get even more money (bailout or otherwise), they can only do worse. The only real solution is less money, and more altruistic hard work.
Well said.
A wonderful article that is long overdue on the flaws in the VC system. Thank you.
Here’s a back-of the napkin analysis that might help visualize the problem: A 1-in-9 success rate requires a 10X return to get anywhere. An acquisition is the most realistic exit and these average at $20-50M, depending on the industry. But a VC is not going to put a dent in a $100M fund with $2M and $5M investments. So the larger the investment, the later stage the company usually is… hence the lower risk, and this this writer proposing VCs don’t take risks.
We launched a new venture at TechCrunch, and it looks like strategic industry money is the best source for funding… here’s the full story: http://bit.ly/YJJne
http://blog.ted...less_electr.php
Successfully crafting businesses is as much an artform as it is a science.
1)Monitoring the nuances of early user feedback
2)formulating a strategy that transforms potential adversairies into supporters and even clients can be traced back to wise investors as well as incredible founders.
As much a I see the advantage of inviting experienced shareholders to help create a successful business, I see the erosion of my influence over something I help found. The direction of a business I build and how it works towards these goals in practice are my primary concerns.
I tell you what’s more flawed.. it’s the ludicrous patents filed by web companies that are approved by the patent office.. these approvals make the Nigerian 411 scams look amateurish to say the least. Even a method of logging in is patented… SERIOUSLY????
And the fact that some VC’s even encourage entrepreneurs to file these silly patents is what still boggles me. What a joke!
that’s a terrific post…. even though I only work for a young company now and not as much helping other companies as I used to be involved in, and I know i sound like a broken record, but the stats still hold:
>1% of all companies who seek VC funding get any, and
The estimated 25.8 million small businesses in the United States:
- Have generated 60 to 80 percent of net new jobs annually over the last decade
- Employ 50.6 percent of the country’s private sector workforce
- Represent 97 percent of all the exporters of goods
- Represent 99.7 percent of all employer firms
- Generate a majority of the innovations that come from United States companies
I would hate to think where the nation would be without those toiling away in their garages….
Wonderful article. Well said. Thanks.
Google was “a huge success” before Kleiner and Sequoia invested? Really? What’s your definition of huge success?
I don’t find much new here other than an attempt to quantify something that probably isn’t quantifiable. I’ve been investing into venture funds for over 25 years now. Bashing VCs is old hat and tedious. Some people shouldn’t take VC money, many VCs do fail to create any value at all, but to suggest there’s no value at all anywhere in the system sounds like sour grapes to me.
If you can’t understand, he’s talking about breakthrough and innovation. All this happened at Google well before the VC’s invested!
Yep, the only innovation part that makes them money had been made by DoubleClick long before they even started a company.
hehe.
Celia,
As someone else pointed out, it is a matter of degree. He isn’t bashing VCs. All he’s asking for, and I think most people will readily agree, is that you don’t publish ludicrous claims like the NVCA does. It is in bad taste.
Any VC worth his salt would throw out projections and estimates from a hopeful entrepreneur if they looked anything like the NVCA estimates.
And yes, bashing _________ is old hat and fun. Fill in anything you want.
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VCs don’t discriminate well between good entrepreneurial teams and bad – and they often compound the problem by putting their own ‘old boys’ into positions they don’t have a prayer of succeeding at while kicking the founders to the curb. What that results in is a system where in order to get your investment at a price I want to pay, I have to bear the costs of your poor prior decisions. In what other business does that happen? The revolution is coming, though. Look at TheFunded,com. If Adeo Ressi wasn’t pissing off VCs as well as he is, he wouldn’t be doing his job. The successful VCs of the future will be doing a much better job on the people end as well as the tech. Hey, after the IP, it’s all about the team.
That’s just nonsense. VCs absolutely discriminate between good teams and bad. Team is the biggest determinant of VC investment.
Very few VCs kick founders to the kerb while the company is doing anything close to performing well… because by and large it’s the team they invested in. Ideas seldom succeed in their first iteration.
As to TheFunded, it’s mainly venting from those who haven’t had a good VC experience…
If you are taking money from VCs who haven’t even been around long enough to have a decent domain name for their fund, and whose partners are younger than most of the founding teams they fund, sure you’re probably not picking well… but entrepreneurs go to those second rate VCs because they desperately need money and hey are rejected by the better funds. If the entrepreneurs felt they could succeed without bringing in the second rate money they would do so…
not quite. kicking founders to the kerb was the norm during the tech bubble. after that meltdown, VC’s realized that the ones that lasted still had their founders.
This is one of the most dangerous and wrong-headed posts that I have read all year. And I’m flabbergasted by the lack of critical thinking displayed in the comments section.
There is definite truth to some of what Vivek has to say. The NVCA’s estimates are bogus, because they equate investing in a company with being responsible for its success. This is an egregiously egotistical assumption.
It may very well be true that the venture industry as a whole trails index investing. It’s hard to pick winners. But so does the entire actively managed mutual fund industry.
But the statement that “VCs at best have little to no impact on these companies and at worst have a negative impact” is absurd.
First, there is a major survivorship bias problem with the data. By interviewing successful companies, the study fails to prove whether VC makes success more or less likely. All it says is that the majority of successful new businesses in the US do not rely on VC.
A number of commentators seem to be of the impression that VCs make easy money by investing in companies after all the risk has been removed by the entrepreneur. This is talking out of both sides of one’s mouth. If the VCs aren’t taking risks, then how can they be delivering sub-par returns? By definition, they must be taking risks.
Venture capital plays an important role in the startup ecosystem. It provides high-risk equity capital to startup companies. Not every company can be a bootstrapped consumer Internet company. Many important businesses (semiconductors, hardware, biotech) require significant up-front capital. If VCs went away, would there be enough funding for these business? Do you seriously think banks would start lending to these companies?
I also wager that most of the commentators pooh-poohing VC would be glad to accept funding for their startups.
“By definition”. By which definition?
“If the VCs aren’t taking risks, then how can they be delivering sub-par returns?”
Kickbacks?
Chris, read the research which I cited about “VCs at best have little to no impact on these companies and at worst have a negative impact”. This was by Masako Ueda — http://ssrn.com...bstract=1242698. These are her conclusions based on rock solid research.
And then read the comment which I left below in response to Mike Arrington about VC.
I am not an economist or academic by any means, but there are several factors that cause me to question whether or not the Ueda paper applies to the Silicon Valley VC model.
1) The analysis specifically applies to manufacturing industries; unclear how it relates to my metier, software and Internet firms
2) I may be misreading the analysis, but it seems like the statistics are based on industry-wide figures for both VC investment and TFP, as reported by various sources. It seems to me that if VC investment is intended to finance unprofitable growth, one would expect short term declines in TFP. The main question would be, what are the long-term effects?
3) I would prefer a granular, industry by industry analysis, which could then look at individual firms on a longitudinal basis. For example, one could look at every single software firm that received investment in a prior year, and follow them to the present day.
I don’t doubt that the research is conducted and statistically significant, but the implications strike as being far from clear.
Just as it’s not the case that VC investment in high-growth industries is clearly the cause of that growth, it’s equally unclear that VC investment reduces the long-term productivity of an industry.
This is not to say that I support a VC bailout. Screw bailouts. All bailouts do is support the weak and incompetent. There are plenty of VCs who are doing just fine.
On the other hand, having the government hand money over to startups is stark, raving mad. If you think VCs are incompetent at allocating capital, just wait until you start a government program to do so!
Man, stop this BS. What do you think the world would look like without governments? No police, no defense, no justice, no medicaire, no public schools, no public hospitals, no roads, no fundamental research, etc.
Do you really thing you would be sitting here writing this BS if there was no government at all? You guys need to stop doing as if there is nothing good the government has ever done.
No government=jungle. Is that what you guys want?
I’m not sure they can survive a minute in a TRUE jungle with their guns.
Because there’s always a more vicious animal with a bigger gun of course (like Pablito type, you know what I mean).
Max, I didn’t say that I didn’t want government. I simply noted that government has a terrible track record of picking winners when it comes to industrial policy.
Government exists for a reason; I’m not an anarchist. But the idea of government VCs should make everyone’s blood run cold. Do you honestly think Congress does a good job of spending money, and that decisions are made on economic, rather than political grounds?
Max, where do you live? I want to live where you do since it seems your government institutions are not inefficient, slow, corrupt, wasteful and filled with people who don’t seek to please the customer.
Man, you guys should be rpoud of the US government. There might be some corruption and inefficiency, but they actually produce something for the society. I’ve worked for many European governments (including EU), and guys, you won’t like it. So it’s faire to try to make the US government efficient. But it’s not by demonizing it. I think that’s the point Max is trying to make.
That last line says it all.
This NVCA claim is exactly (to the 10th decimal digit) as ridiculous as Vivek’s claims on the importance of H1Bs for the US economy, its funny how VCs, H1Bs etc are the sole reason anyone of us have any jobs..
This is just propaganda for tax breaks and bailouts, total b.s, hwo much each person is worth is well demonstrated by his success, no need for these “studies” with conmen like Wadhwa..
some great points here that I agree with. But let’s not throw the baby out with the bath water. VC’s play an absolutely critical role in the startup ecosystem. Capital creates capital.
Human effort creates capital, read the ‘Capital’ (including the intellectual effort of course).
Absolutely…
I get that a lot of readers of TechCrunch have reason to be pissed off with VCs that said no to funding their companies. Most start-ups fail and it’s a far sight easier to blame the VCs. But if their money wasn’t needed we wouldn’t take it.
And this obsession with angels instead is stupid – sure there are a handful of big name angels with names we know that are doing well. But most angel investors are harder to work with than VCs, take as much effort to close on investment, and often the process just adds one more round of dilution to the entrepreneur.
VCs are essential to those of us with fast growth startups that need capital to really explode out of the gate and swing for the fences (to mix my metaphors). Some of them are less good than others, but the entrepreneurs going to those VCs are usually higher risk anyway (or they’re more likely to have been snapped up by the better VCs already).
I’m more concerned with the ones that got a yes and then had their fledgling companies ruined by hamfisted hacks with more money than sense or operational know how. The horror stories far exceed the success stories…
Mike, I’m not saying that VC isn’t important or useful. The point is that VC’s follow the innovation. The real risks are taken by the entrepreneurs. My belief is that if we want to grow the economy we need to do this by fostering innovation and entrepreneurship. So rather than going to the middlemen, go to the source of this innovation — the entrepreneur. Give them the tax-breaks rather than VC partners. Spend the money on educating them. Help them gain access to the biggest goldmine of technology out there — the University research system (I’ll write a piece for you on this in a couple of weeks).
Someone questioned if Microsoft was indeed a “fledgling startup” as I wrote. You have to put things into context. We started a $150 Million project in 1986 and bet on Windows. Microsoft did around $100M in revenue in 1985. So this was a huge risk and by our standards, it was just another tech startup.
And as far as Google goes. I was using this technology as soon as it came out of Stanford. It was a killer technology. VC’s didn’t invent it.
Hello Vivek, I enjoyed your article. The finer grained message of your article, that VC’s frequently follow instead of foster innovation is getting lost in the larger more emotional battle of VCs “good or bad”.
The sad truth is that it really does seem that some people are more eager to protect their “tribe” and vent their wrath on whatever topic seems to overlap with theirs and poses a perceived threat, rather then calmly discuss important issues. Fortunately I see many comments on TechCrunch that are of the latter calmer type, but as usual there will be enough of the the former to raise the noise level. Please keep writing. Thanks, Robert.
but entrepreneurs do get tax breaks. long term capital gains rates are very low. Venture capitalists allow those entrepreneurs to get going. I mean, without them, how would a business that actually requires capital get going? it wouldn’t.
I think it might be better to say that venture capitalists allow some entrepreneurs (that require capital) to get going who without that capital would be DOA. Otherwise the extrapolation of that line of logic is that venture capitalists are directly responsible for getting going every business that ever needed capital to get started. Even if you reduce that assertion to the majority case instead of the all inclusive case its still hard to believe. Perhaps it is true in the Silicon Valley and I don’t mean that sarcastically, but as an observation of how potentially unique the Silicon Valley microcosm and financial ecology may be to the rest of the world. But I would be stunned to learn that without VC’s most of the businesses around the globe that needed to capital to get started would never have opened their doors and flourished. They just found other ways to get it done or did it more slowly.
Google would never have become a company without VC. They raised $25 million dollars, and didn’t generate any revenue for two years after that. That’s not bootstrapping.
And they didn’t find a business model for at least two years, and they actual bought a company that was the basis of the Adword/Adsense platform. Of course at least ten people from Google always claim to have come up with the idea of that platform.
vivek
good article. the NVCA is not doing anyone any favors with its exaggerated claims. thanks for calling BS on them
and i agree that VCs should not get capital gains treatment on fees they get for managing money. cap gains treatment should only go to those who invest their own capital (or sweat equity as founders do)
and you are right that founders do the innovating and VCs do the funding.
but, and this is a big but, VCs really do help entrepreneurs a lot. at least the good ones do.
VCs do two things for innovation. they finance it and they provide advice and counsel to the entrepreneurs they back.
the good ones are worth every penny they make. the bad ones are awful and are indeed a tax on innovation
fred
Fred, I agree that “the good ones are worth every penny they make. the bad ones are awful and are indeed a tax on innovation”. Many of my VC friends are incredibly smart and competent. But there are far too few like this. And most entrepreneurs couldn’t even dream of getting access to this caliber of VC’s. They have to deal with the freshly minted MBA’s who think they hold the keys to heaven.
Mike, very few companies receive venture capital. Yes, I know that in the universe that you hang out in, you see many good VC funded companies. Go outside Silicon Valley and you’ll see what things are really like.
Another thing which is clear after reading all these comments is that much more hard-core academic research is needed on these topics.
I agree, it’s a different VC world outside of Silicon Valley. Perhaps the main point of the article is missed by many: it’s entrepreneurs that drive innovation, not VCs. Entrepreneurs create opportunities, think the impossible, are undeterred by limited resources. I know, I’ve walked the walk without a single VC dollar (still resisting, though, for how long yet to be seen!) and have been profitable from day one – granted not in billion dollars unlike MSFT or GOOG. Though some see the article as bashing VCs, I see it giving due credit where deserved – to entrepreneurs.
Thank you, Vivek!
Better still, eliminate tax breaks for VCs and give them to corporations if they fund a national start up capital fund. Or move part of the corporate income tax into the said fund. Eliminate the middle man, the gov, benefits, the VCs go away or get creative and competitive.
OK, I’ll take the bait. Let’s take this “public option” mind experiment further that Vivek has kicked off and Phil/others have run with. Without an infinite supply of capital, who exactly would decide which entrepreneurs/technologies to fund in this “gov is the VC” model? What kind of skillsets would you want and would they be salaried employees or have some stake (”carry”) in the upside of their decisions? These aren’t all my questions, but a simple start…
i tend to agree with mike. the nvca’s claims are obviously absurd and no one is claiming that vcs create innovation– not even vcs themselves. but venture capital is a useful tool in building a high-growth company– in some industries an indispensable tool.
it’s analogous to an IPO– there’s nothing inherently good or bad about a company going public, it just has to be done responsibly and for the right reasons. there’s a world of difference between awesome technology and great business. without VC investment, i’d bet google got sold early on and probably scrapped by now (let’s remember now defunct exite was an early suitor.) that deal *was* a risk– everyone thought search was done and most firms even in a time flush with money turned it down.
VCs can’t claim credit for google’s success, but that doesn’t mean the money wasn’t instrumental to building a multi-billion company.
there are good VCs, bad VCs. deals for which it makes sense and those where it doesn’t– same with industries. i’ve criticized their lack of risk taking in recent years more than anyone on TC. but let’s not confuse the NVCA’s lobbying with how the industry always operates or thinks in the trenches.
Two major shifts in VC happened in the nineties.
1. They became more comfortable investing in application-level products rather than lower-in-the-stack platforms. Examples: help desk software, CRM. This plays out today in their willingness to invest in relatively easy-to-copy companies built on frameworks like Ruby on Rails.
2. IPOs before profitability became the norm. Pre-Netscape, the conventional wisdom was that you had to have eight quarters of rising profits before the IPO. Once the public markets bought into the dream, VCs were much more aggressive in bulking up companies with capital even if they didn’t have the management infrastructure to deploy it wisely.
The first Dotcom crash and Sarbox put a bit of a kibosh on #2, but it didn’t change the way VCs think in terms of absolute dollars. In the early 90s a $4 million round was considered a lot of money to invest and a huge fund was $100 million. Now that’s just the first round and VCs have to manage a much larger protfolio.
Sarah, I never said that VC’s can’t do good. The point was that the NVCA claims are absurd. They are making ridiculous claims about how they created industries, created 81% of the jobs, etc. And they are using these to lobby for handouts — for government intervention. That was the point I made.
I also agree that there are some great VC’s. Some of these are my good friends. But there are far more who are not competent. The problem is that there is so much money in the system that these bad VC’s are competing with the good ones by funding “me-too” companies –and this creates unhealthy competition. Everyone loses.
And Dan, the last thing I want is government intervention. What I would like to see is more investment in education, tax-breaks (in whatever form make the most sense) for entrepreneurs, gateways to the innovation locked in universities, etc., etc. I am totally against giving the VC’s the same types of handouts we gave to the investment banks.
Take VC money or not, and if you do, negotiate hard, but if they are looking at you, you are likely in the left side of the innovation bell curve of your sector. If Accenture or Bechtel or Verizon are looking at you, you are likely at the other side of the curve. as I wrote below
Where would you rather be?
http://dealarch...is-capital.html
VCs are vultures, what they talk on the stage is completely different from what they talk in person, unless they smell blood they don’t even spend few minutes with you of what they preach on the stage!
2 and 20 should be a class 4 felony. Put these blood suckers in jail and und start ups from a national fund paid for by an R & D tax on corps and give start ups tax free status for 5 years.
“It is the entrepreneurs who fuel the economy, not the venture capitalists or investment bankers.”
Well put – Vivek!
VCs are, at best, benign parasites. Nothing more.
As a career investment banker turned (successful) entrepreneur, I could not agree more with Vivek. Barring a handful of exceptions like Vinod Khosla, VCs today don’t fund anything that remotely looks like a “venture”.
They all dutifully line up behind the same group of entrepreneurs who have already defied gravity to become successful competing against giants in the industry. Then they would aggressively bid against their neighbors on Sand Hill Road, also looking for a “piggyback ride” from the same entrepreneur on his way up.
What a bunch of bullshit!!! and this guy is a professor…! Are you kidding me. Of course there are VCs that don’t add value. As there are entrepreneurs who fail.: most of them. How ridiculous to claim that Sergey and Brin had already succeeded when KP and Sequoia invested. That shows a total lack of understanding of what it takes to build companies.
Also, I suppose capital would also grow on the trees for these “innovative” companies to go and harvest, so there is no need for VCs…
In the old days, when capital was hard to access there were some great entrepreneurs (few) that could get to profits without much help and capital. Some still do it but are the exception. The real world is a little different. You need capital and help with networks and other things to build a LARGE innovative company. Those things don’t grow on trees.
I am disappointed that TechCrunch gave space to this idiot.
i haven’t finshed reading all the comments yet, but i just scrolled down and there’s only one below this and since you sound the angriest and it seems like you haven’t gone through all the rest of the comments, or even seen vivek’s reply to arrington, i will just voice my opinion regarding your comment.
it’s funny that you’re sneering at vivek’s research or all the other research that has been done on this topic, unlike the bogus and impossible to calculate claims (really. that high of a percentage by the nvca’s?) made by the nvca. yeah he might be a professor but he wrote this piece with careful thought and backed up his statements quite astutely. i don’t know what your profession is but maybe before you poop on someone else’s why don’t you just do us all a favour and tell us what you do.
i’m not a vc, i am not an entrepreneur, i’m not involved in tech, but i am a creator. i don’t innovate as of yet and i am one of many who are trying to recreate the wheel, but i’m hoping that with hard work and a lot of focus i will come up with something that is worthy of investment. i’ve been following companies being built from scratch for many years and i’ve followed them all the ways through to their getting capital from many sources and some companies failing or succeeding. over the years i’ve heard people coming from vivek’s point of view and i’ve heard people from the nvca point of view who wax lyrical about how vc’s are the one’s who make these companies. money is important. it’s always important despite people who always say it’s not, but that doesn’t mean that vc’s are the only reason (as much as the nvca would like to make it seem) that companies are successful. i’m not surprised by what vivek’s research showed because i’ve read in the business magazines, have seen direct interviews by the heads of companies who have made it all the way without ever taking vc money, angel money, or government money. it’s surprising but entirely possible. just like it’s more believable that for every company that recieves vc and succeed, there are more who fail and there are even more who never get that oppertunity to get any money.
i think maseko is right in what she’s found and more needs to be done like others have suggested on tracking all of these processes. with the question that is being asked with the title of this piece, it can also explore what vc’s have done for innovation, have done for companies, because it is necessary to find out that information first and then to calculate what vc’s aren’t doing for innovation and for companies. the greater point that boils down and i don’t really think this is an insult or an attack to vc’s really unless they are of small ego’s and need some favouritism, is that venture capitalists do not create and therefore should not be smacking entreprenuers-creators-innovators in the face claiming all success. it’s not that capital nor investment aren’t important. it’s that the vc criteria is distinguising which ideas will make it and which one’s won’t and then investing in the one’s that they feel have a good chance of making succeeding. sometimes vc’s invest in innovation and companies that they know will not bring them a lot in the end game, but that would basically defeat their purpose. aren’t vc’s out there to invest in ideas and companies and try to foster them as best as possible and then think of an exit where they can capitalize the most.
if vc’s were in the game of innovation they would lose a lot of money, more than they currently lose, like how entrepreneurs who start out lose a lot of money. they, vc’s are not in the area of creating ideas. they foster idea’s to a limit. some vc’s don’t even care about the process and just play with money because they can. yes innovators at some point will need money that isn’t their own to go to the next step of creating the idea and making it concrete and then the next step of testing the idea and then launching, success, fail, etc…the entire cycle, but the idea stands alone from venture capitalists and what they do. the money might help in the self directing of the idea and the innovation but the actual initial thought is from the creator and is most likely progressed by the creator. if the idea is good it will succeed with or without outside help. at some point the creator will need to consider going the venture capital route or not. although many people try to get the money, they don’t always receive the backing but that doesn’t mean that their idea or the possibility of the success fails at that point. for some people vc’s are game killers and for some they are the only way to get to that next level of fostering an idea into a concrete idea or company.
the ideas and the innovators are the winners in the end. vc’s aren’t innovators. from my observations i would say that they are more follow the leader types. it’s true that they say that they created biotech and it’s because of them that’s why there’s a biotech industry, and i know there is a lot of investment in that sector, but those creators would have won out with or without the capital. i think i would need to think of vc’s as creators to think of them as innovators and to me they are not right now. they innovate by doing what, investing in fledgling companies or ideas, or being the first to make contact with an entrepreneur before launch? how are vc’s innovators and how do they really foster true innovation? is it because they have a herd kind of mentality with people trying to strike the next big one and get the money before they move on to the next venture? money should never be what drives innovation and should not be the underlying basis of vc’s and what they do. ideas should be the main focus and i’ve been following companies for more than 10 years and i’ve found that as the years go by i’ve become more cynical about what vc’s do. can they really lay claim to all the innovation that comes from actual inventors or should they lay claim to the public successes of a company after it has launched?
i’ve heard more than a couple of interviews where these so called capitalists say things that make it seem like they are gaming the system and that can never be a good thing for innovation…things like my protfolio has to be diversified but i have a large portion of so and so investments in solid compaines and then the rest i have in fledgling companies. are they not in the game of risk, or is it risk and make lots of money? is the money more important than that accumulated risk that would probably benefit and move inovation forward? is the risk too dangerous for some venture capitialists who are actually in the game not to lose money but to gain money? i think vc’s and entrepreneurs are actually the same kind of people and aren’t far off from each other. they lose and they gain money. i don’t think the current actions i’ve seen from that industry suggests that they value innovation more than making money though and i think that it should be completely opposite. ideas make money. good ideas make even more money but that influx of capital shouldn’t be stifiling creativity as much as it should help to move things forward.
i think it’s a good thing vivek posted this so that we can discuss all the sides to this issue, because it’s nothing new. it’s something people are talking about, not always in the context of the tech industry but in many other professions as well. creators are all the same everywhere, with or without vc money. they are the one’s with the most to lose and the most to gain. i think it’s hilarious these numbers the nvca is throwing around because it suggests that not all is right in their world and that something might be amiss. it’s like trying to pull a fast one on people/wool over people’s eyes.
i’m sorry you think vivek is an idiot for what he wrote really, because i thought it was a good piece of writing…certainly better than the new time articel on glen beck. i would have liked it if this had been a general comparison contrast of good and bad about the vc industry, but i’m alright if the talk is about innovation because as we are all discussing about other industries with old models are being killed right now and are in need of some innovation.
i think the symbolism of vc’s being like sharks or any kind of animals (which humans are) that smell blood and go in for the kill is quite apt. thanks for the article vivek!
way too wordy. painful.
Noah, your post is longer than my article!
Thanks…
Well, how many people actually read this comment? Not me; way too long for a comment.
> They added up all the revenue generated in 2008
> by any company a venture capitalist ever invested
> a dime in.
It is a widely known fact that all software product planning is done using Post-It notes. Therefore, 3M is responsible for all revenue generated by software companies.
hahaha. what are the software prduct planners going to do when post-it’s die. haven’t they heard, post-it’s need to be innovated. that glue one side of small colorful paper to make a stack idea is dying out and needs a revamp. they need some vc’s apprently because vc’s lead ideas to success and not because the ideas themself are good enough to be successful.
Its surprising how one-sided the claims are of both Vivek’s research as well as that of NVCA. Its mind-boggling that the Leadersip of the NVCA authorized such claims.
There are wealthy countries and sovereigns without entrepreneurs, and hence without vibrant economies. And, countries with enterprising (if not entrepreneurial) people sans organized venture capital or finance, also without economic vibrancy.
It takes two to tango. This is well-accepted, so no need for any side to overstate their case.
VC is like professional poker. Every once in a while some amateur is going to win a tournament but the pros always make the most money. Much like poker gained in popularity so too have the VCs and more importantly, the LPs providing the core funding. Too much money in the system
oh, and right in time!! the tc50 show was all about “me too” investing opportunities, low risk, minimal capital requirements with an exit for sale only, no interest in scaling or dominating anything…
All of the back and forth here is a perfect illustration of the fundamental lack of understanding about Venture Capital by many entrepreneurs. It happened to me early in my career and I got my head handed to me. It also was the most important learning experience of my life.
My next venture, I bootstrapped and only brought in VC capital at the expansion stage. We were already profitable. That led to a grand slam acquisition. But not every concept can play out this way.
Today I am a VC by personal choice and I spend much of my time counseling entrepreneurs about how to finance their companies and effectively work with VCs.
It’s all about alignment of expectations and an understanding of the commitment you make by taking $$millions from a third party who has a responsibility to generate returns.
The biggest problem with the riff here is people grossly generalizing VCs. Same thing with Angels (who are also VCs.) Every firm is different. Every individual VC is different. Just like every Entrepreneur is different.
You have a unique perspective on several disparate sides of the entrepreneur/VC issue. Why not write an article for TechCrunch? I know I’d like to see it.
yeah moi aussi! based on what i just read from you i think you should right on what you’ve exprienced so far so that we can learn from your pov’s. it would be greatly appreciated. i’m actually not thinking of this in matter of just the tech industry since this is easily applicable to something like government funds for arts and culture groups or governments investing in local entrepreneurs but i understand that on this site the main conversation surrounds the vc and entrepreneur relationship. contact techcrunch about writing something for this. thanks.
good comment vc’s. i am guilty of boxing in all vc’s and all entrepreneurs although i know each are individualistic.
i don’t think that the issue hear is that there is no need for vc’s. they play a part in the process, more for some companies than for others. what is kinda disturbing is this perspective of making money or as much money as possible. entrepreneurs are not excluded from that at all, but it’s hard to find the altruistic vc’s out there who do this because they truly believe in innovation or they truly believe in an idea, instead of being the next whatever or the next follower. all vc’s i guess go into their investments with a specific perspective, but how do we detrmine if it’s good for us creators or bad. why isn’t there more being done to study this or atleast keep track of what is going on?
The landscape for Internet start-ups is an interesting and exciting challenge for entrepreneurs and investors alike. The barriers to entry are very low to launch a web app, widget, website, iphone app. But building these into significant enterprises at scale are another issue.
In the last 10 years VC’s have indulged entrepreneurs by investing in a deferred business plan concept I refer to as “If they come, we will build it.”
The current poster-child for this model is none other than Twitter.
More about what this all means here:
http://tinyurl.com/lqohsr
sound to me like the VC problem is that it shifts the focus from “lefts create something” to “lets get as much money out of this as we can, now!”…
When the NVCA makes these claims, I honestly don’t believe they are trying to take anything away from the entrepreneurs (who deserve most of the credit). VCs can be involved with creating “x”M jobs, but it doesn’t mean that they are saying the entrepreneurs don’t deserve much/all of the credit. Even if VCs deserve a tiny amount of credit, it still supports the importance of the asset class.
Dont u think the money they make is not enough of a reward that they need capital gains tax breaks, We keep balooning our deficits and keep compensating rich people for the supposed jobs they create while making millions, this is lemon capitalism.
Those claims are not just for capital gains tax breaks.
else what? Bailouts?
Vivek, good article. I wonder if perhaps someone could put together a more fine grained study that goes back and talks to companies that *did* receive funding and ask them about the impact and efficacy. The compare them to an equal number of companies in the same industry that didn’t and see what comes out. It would be a qualitative study, sure, as the data would be very hard to make objective. But perhaps you could even use CrunchBase to launch it?
Alex, great idea and this needs to be done. Maybe Mike Arrington is interested in collaborating.
Mike, if I can play on your turf, maybe you need to visit mine!
Heartily concur with you and Alex. We need a truly applicable analysis for the Silicon Valley VC model. I’m afraid TheFunded.com isn’t quite rigorous enough!
Post is spot on. VC does play a significant role in nurturing startups. But if an idea has arrived VC or no VC it will definitely take shape.
Good post Vivek!
In the very early days of our company, we thought that VC was the only way to go.. Thank goodness we did it on our own because if we had taken the money we would likely be out of business by now.
We retained 100% control of our company built a little slower / smarter today we are the only profitable company in the podcasting / new media space.
I am very happy we did it without them and guess what the company is 100% ours.
Excellent analysis -nice job
Excellent post and analysis. As a former investment professional at PE firm TA Associates, I couldn’t agree more with this post.
I’m currently launching my first start-up and the plan is to never have to raise VC money.
Why would you want to give them preference/redemption rights as well as the ability to fire you from your own company (your baby)? Just go with angel investors who will invest in the same stock class as you and will have the operational experience to help you out.
VC money is overrated in the Internet industry especially. I can understand how you may require in the semiconductor and biotech industries though.