Venture Capital: A Part Of The Ecosystem, But Not The Ecosystem

from the understanding-vc dept

Mon, Sep 21st 2009 10:17pm — Mike Masnick

This happens every so often, but in the last week or so, there's been a spate of "VCs are bad" types of discussions happening on various blogs. It kicked off with a blog post from Jason Fried at 37Signals, blaming VCs for pushing Mint.com to sell to Intuit. VC Fred Wilson did a nice job responding to that charge by pointing out the usual calculus in figuring out when to sell. Amusingly, very few people seem to notice what Fred was basically saying in his post. The undercurrent was that Mint.com likely wasn't doing nearly as well as its cheerleaders have assumed -- and thus, selling out made a lot of sense, not from a VC perspective, but from the founders' perspective.

Still, it's pretty popular in Silicon Valley to knock VCs, and TechCrunch has a post from Vivek Wadhwa pouring on the VC bashing, complaining about VCs taking way too much credit for innovation. Now, I'm a big fan of Wadhwa and his research on startups and innovation, and I'm among the first to bash VCs when it's warranted (and, yes, there are plenty of times when it's very, very warranted), but I think Wadhwa's piece goes too far. He's right that it's a little silly that the the National Venture Capital Association (NVCA) seems to be taking credit for all of the revenue and jobs created from any startup that has ever taken any venture money, but that doesn't mean that venture capital is meaningless in innovation.

While I'm actually a huge fan of building companies without venture capital (and am doing that myself), I think what people need to realize is that venture money is quite useful in enabling certain types of businesses. The problem is when people (very often Silicon Valley people) get into the mindset that raising venture capital is an end goal in itself, rather than looking at the overall business and seeing if it even needs venture money. During the dot com bubble, there was a time when people looked at venture capital like revenue -- the more you raised, the better you were doing, rather than recognizing that it really meant you just had a bigger hole to dig yourself out of. However, in some cases, where a company really does need investment capital to take a business to the next level, smart venture money can be a great help.

The nice thing today is that more and more businesses can be started, built and can scale without that need. That doesn't mean that there's anything wrong with venture capital. In fact, it's better if it's easier to build businesses. But that also doesn't mean that VC is somehow bad or isn't really a key part in accelerating certain innovative businesses. Venture capital is a part of the ecosystem, and that's a good thing. There are times when people give it too much credit, and there are other times when it doesn't get enough credit, but the real trick is just in understanding where and when it makes sense.

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Filed Under: innovation, silicon valley, venture capital

8 Comments

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Vivek Wadhwa, 22 Sep 2009 @ 5:33am

You're right
Mike, I'll acknowledge I was very harsh in the TechCrunch piece. But I was trying to set some very important facts straight. The NVCA claims are completely of line and do a disservice to the VC and entrepreneurial community. Our economy is in real trouble and we have big problems to fix. We need to foster entrepreneurship and innovation on a grand scale to get back to 3-4% growth rates. So we need to have sensible, grounded national policies. With the NVCA literally saying that they are the key to economic growth, they confuse the issues. The NVCA seems to be saying, "give us the handouts". (I don't believe anyone should get handouts, by the way). Also, I have never said that VC isn't valuable or that all VC's are bad. I know many good VC's who add tremendous value to their investments and who have vision. The majority aren't like this. The problem is that with so much money sloshing around the system -- in the hands of inexperienced VC's, too many "me-too" companies get funded. And this creates unhealthy competition. Ultimately everyone loses. You're absolutely right that the real trick is just in understanding where and when it makes sense.
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Joe Johnson, 22 Sep 2009 @ 6:00am

Software/Web = Only type of Startup?
I think a lot of the folks in Silicon Valley have blinders on but don't realize it.

From Paul Graham to Tech Crunch it seems that Software/Web start ups are the only type of startups that exist (or at least the only type they think are worthy of righting about).

Their advice is no very helpful to those who are making real things for example. They are always advising to release early and improve. For a complex physical product, tooling up and releasing a crappy beta is one of the surest ways into the deadpool.

The advice about VC is one of the consequences of this blind spot.

Joe J.
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Marc Dangeard, 22 Sep 2009 @ 7:28am

Numbers
"The nice thing today is that more and more businesses can be started, built and can scale without that need."

The top 500 fastest growing companies from Inc Magazine only needed 75K on average to get to that position. And only 6% of them required VC money

"venture money is quite useful in enabling certain types of businesses"

VCs themselves will tell you that they serve only 1% of the entrepreneurs that send them a business plan, while the 4 yrs survival rate for small businesses is around 43%. So clearly VC are good for only few, and then the question is, are they really that good for these. They themselves will also tell you that from these selected few (the best of the best if you believe that there selection process is worth anything), 1 will be a killer app, 3 will be ok and the rest will be goners. Not much better than the average survival rate overall...
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TheStupidOne, 22 Sep 2009 @ 8:27am

Re: Software/Web = Only type of Startup?
my impression is that software/web doesn't need lots of money to get off the ground. For them VC can take them from small to big very fast which make some sense if you have an interaction with the physical world.

Companies that actually make things pretty much need VC money. SpaceX in LA is a good example of a startup building real physical things, full size rockets capable of launching satellites. And each one of those things requires LOTS of money and LOTS of development work. Now I don't know the details of their financing other than their famous owner/CEO, but if they didn't have a super rich guy at the helm they could only succeed with huge amounts of VC money.

So if your primary cost is your time and energy writing software, don't use VC. If you primary cost is hundreds of employees and a factory you should probably get vc money
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Roger Toennis, 22 Sep 2009 @ 9:03am

Re: You're right
On your point about ..."Our economy is in real trouble and we have big problems to fix. We need to foster entrepreneurship and innovation on a grand scale to get back to 3-4% growth rates. So we need to have sensible, grounded national policies." I completely agree...I've been trying to get an idea I have for a way to do this circulated since last fall. Could you please take a quick look and tell me what you think... "Civilian Innovation Corps": A solution to the 'innovation and jobs problems'. http://my.barackobama.com/page/community/post/rogertoennis/gGg7rK Roger
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Gene Cavanaugh, 22 Sep 2009 @ 9:53am

VCs as the bad guys
Mike, this is a well-written, well-thought-out article!

Years ago (before your time) there was a "kill the engineers" mentality - and since Pliny (repeated by Shakespeare) there has been a "kill the lawyers" mentality. Being both, I get a lot of that (and, of course, having a doctorate has convinced many people I am arguably a moron - why else would I get all that (unnecessary) education?

So now it is "kill the VCs" - ordinary people, doing an ordinary job, but convenient targets. Some good, some bad, but all painted with the same tar brush!
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Vivek Wadhwa, 22 Sep 2009 @ 7:56pm

Re: Re: You're right
Roger, the idea of a "Civilian Innovation Corps" is quite radical, but sometimes you need radical thinking to achieve change. Right now, the U.S. economy is in serious trouble. At best, we're looking at 1-2% growth rates. How do we get this to 4% or even 5%? Do your ideas make sense? I don't know. They seem like the radical thinking which got America to where it is. I would encourage you to present this to other scholars and solicit a reaction. Perhaps write opeds for some newspapers.

Regards,

Vivek
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AV, 27 Sep 2009 @ 6:51pm

VCs and Innovaion
Mike, I couldn't agree more that Wadhwa's piece goes too far, the innovation ecosystem is fragile and the last thing it needs is people like Wadhwa causing an unnecessary break in trust. Venture investment is meant more to take an innovation to the next level, raising its impact and growing its reach, not to prompt innovation. I've written about this more on my blog: http://bit.ly/iPpEE
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