Why VCs Dont Suck from an ex-Enterpreneur and Current VC
Topics :
Start Ups ·
Venture Capital ·
Aug 09, 2009 | 0 Comments
VC Bashing is the favorite topic for enterpreneurs who don't raise funding and in some cases even for those who do.
Andy Sack, whose blog I read religiously, is a serial entrepreneur and current early stage investor based out of Seattle. He wrote a post in defense of Ignition partners, a Seattle based VC firm, and VCs in general who has been getting negative press because of some failed investments.
Some of the reasons VC's dont suck:
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Pattern identification: Venture capitalists can be very helpful in pointing out patterns (of both success and failure) because their job enables them to see dozens of companies trying to scale at the same time. This perspective can be very powerful and helpful. What works in one market as a tactic or strategy may well work in another.
External accountability: Venture capitalists act as time and promise keepers. Knowing when to hold executives accountable and when to let a promise pass is a vital skill for a VC to possess. In early-stage companies, it is too easy for entrepreneurs to allow missed milestones to become the norm. Having an external promise keeper increases the accountability of the CEO and the management team. In so doing, that helps the company succeed.
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On how hard it is to raise Capital
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First, it's easy to forget that the business model is to invest $5 million into 20 companies (for a $100 million fund) and have two of the companies return the entire fund plus some. You know the saying that one in 10 companies pays for the entire fund.
To be successful, that means a venture capitalist may receive 2,000 business plans, look closely at 200 of them, and actually fund 20.
In other words, for every 100 business plans, a venture capitalist says NO to an entrepreneur 99 times. That's a lot of people that are told that their plan isn't good enough, that their business doesn't scale, that they're not qualified to be CEO, etc. That's a lot of "NO!"
Another way to think about this is it's five or 10 times easier to get into Harvard University than it is to get venture capital. Of the 20 "lucky" entrepreneurs that venture capitalists say "yes" to, about eight will be singles and doubles and 10 will be losses or flame outs. In the situation with the 10 losses, the venture capitalist and the entrepreneur are going to have a lot of tough conversations.
To be successful, that means a venture capitalist may receive 2,000 business plans, look closely at 200 of them, and actually fund 20.
In other words, for every 100 business plans, a venture capitalist says NO to an entrepreneur 99 times. That's a lot of people that are told that their plan isn't good enough, that their business doesn't scale, that they're not qualified to be CEO, etc. That's a lot of "NO!"
Another way to think about this is it's five or 10 times easier to get into Harvard University than it is to get venture capital. Of the 20 "lucky" entrepreneurs that venture capitalists say "yes" to, about eight will be singles and doubles and 10 will be losses or flame outs. In the situation with the 10 losses, the venture capitalist and the entrepreneur are going to have a lot of tough conversations.
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