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Funding for startups

VCs: 'We're Not Broken, Dammit!'

BOSTON -- Is the venture capital (VC) model broken? Judging from a panel of experts here at the NGN 2003 show, it's not easy to get a straight answer -- especially when all of the panelists happen to be... VCs.

The panel -- entitled "The Broken VC Model: Where Will Innovation Come from?" -- included four partners at venture capital firms. All of them had short presentations that could be best described in the "Glass Half Full" style, as they all predicted the industry was on the verge of bouncing back.

Not surprisingly, they encountered some friction in the form of questions from the crowd and also from moderator John McQuillan, the chairman of the NGN conference, who happens to be an "ex-VC" himself, in his own words. (His portfolio once included Maple Optical Systems, RIP -- see Maple on the Money Trail and Headcount: Miller's Oranges).

"This gives me a chuckle... 'Where's the innovation in the VC World?' " asked McQuillan, reading from one of the question cards from the audience.

In their presentations, the panelists pointed out that from an investment perspective, there's no way to avoid ratcheting back company valuations and expectations after the bursting of the bubble, because the exit valuations are no longer high enough to justify investing large amounts of capital in startups.

"Hope is not a strategy," said Rod Randall, general partner at St. Paul Venture Capital. He pointed out that the numbers simply don't work at sky-high valuations, and they need to be scaled back. He implied that the trend of the "zero-pre-money" round, in which a company receives a valuation of essentially zero before receiving its venture money, could continue for an indefinite period. And he said the most viable strategy for startups is to create products that add incremental improvement to existing networks.

But there were those who said they were still swinging for the fences. The most optimistic of the panelists was Roland Van der Meer, a partner at ComVentures, who noted that "great companies are formed in bear markets."

Also weighing in on the more optimistic side was Dave Furneaux, a managing general partner at Kodiak Venture Partners, who said his firm has invested in "34 new companies in the last 48 months."

But McQuillan -- and the crowd as well -- appeared to buy into little of it.

."I think the VC model is broken," said McQuillan, "And innovation is now more likely to come out of research departments of large companies."

The panelists did appear to concur that venture capital is a competitive industry, and that there were far too many venture capitalists than was healthy. "If you look at mutual funds, only about 5 to 10 percent of them outperform the market," said Van Der Meer, "and I think you'll see the same thing in venture capital."

There are probably too many VCs," said McQuillan. "There are 8,000 VCs funding just 1,000 companies per year."

McQuillan also dredged up another ugly statistic: Over the last three years, the average return on venture capital portfolios has been about -25 percent.

"Some investors aren't asking for a return on capital, they're just asking for their capital to be returned," said McQuillan.

This, course, leads to the question of how many of those panelists will keep their jobs. They didn't look very worried.

— R. Scott Raynovich, US Editor, Light Reading

Dr_Moose 12/4/2012 | 11:14:46 PM
re: VCs: 'We're Not Broken, Dammit!' thanks lightbeer, good advice and good link.

lightbeer wrote:

http://www.businessweek.com/sm...

VCs are like any other banker/lender. Get a good lawyer on your side to negotiate a deal. Remember to shop your ideas around to different VCs and get the best deal for your company. VCs have fiduciary responsibilities to their LPs only and will only hang around if there is a possibility of making ROI for their funds. During the bubble VCs played the numbers game, thinking that if just one hit it big the other ten companies they funded could bomb out.
alchemy 12/4/2012 | 11:15:42 PM
re: VCs: 'We're Not Broken, Dammit!' So overall the best play is to be "available" when the VCs decide to bring in the "experienced" team. The VCs tell the team the new boys will fix all "problems". It's true in some cases, but in most it's just a play to get a bigger share of the pie. So my advise is don't try to change the game...run with it, expect it, play to it...not against it.

The track record for restarts on startup companies is poor. In my opinion, the only time a restart is justified is if the original 'idea' was good (a unique product and a market for that unique product) but the execution stunk. I keep seeing restarts where there are similar products being developed by several competitors at roughly the same level of product maturity. That's VC denial, not sound business practice.
whyiswhy 12/4/2012 | 11:15:43 PM
re: VCs: 'We're Not Broken, Dammit!' I agree having a good lawyer on your side helps enormously. You can avoid the worst of the tricks. But the issue is will you get something for all the effort (of starting a company)? In this market segment, the realistic answer is no. The main reason is you will not get competitive term sheets. You will be lucky to get any term sheet, very very lucky.

So overall the best play is to be "available" when the VCs decide to bring in the "experienced" team. The VCs tell the team the new boys will fix all "problems". It's true in some cases, but in most it's just a play to get a bigger share of the pie. So my advise is don't try to change the game...run with it, expect it, play to it...not against it.

The rest is the usual DD-stuff.

-Why
lightbeer 12/4/2012 | 11:15:47 PM
re: VCs: 'We're Not Broken, Dammit!' http://www.businessweek.com/sm...

VCs are like any other banker/lender. Get a good lawyer on your side to negotiate a deal. Remember to shop your ideas around to different VCs and get the best deal for your company. VCs have fiduciary responsibilities to their LPs only and will only hang around if there is a possibility of making ROI for their funds. During the bubble VCs played the numbers game, thinking that if just one hit it big the other ten companies they funded could bomb out.

The VC community set themselves up for failure by promising returns of 30, 40, 50% to there LPs based on unrealistic expectations of there portfolio companies.

As an entrepenuer get a good lawyer with connections to the industry that can do some due dilegence on the respective VCs and see what their track record is and what they are promising to their LPs.
krisman 12/4/2012 | 11:15:50 PM
re: VCs: 'We're Not Broken, Dammit!' ... and there are companies such as Cisco which vaulted to success because the board fired the founders and brought in professional management.
Heb81 12/4/2012 | 11:15:54 PM
re: VCs: 'We're Not Broken, Dammit!' Alchemy,
" I've gotten much better at picking opportunities where the management team isn't likely to get swapped out by the VCs and I've had some success with my more recent startups."

would really appreciate your sharing the criteria you used to filter out investors. Don't have any firm data, but there are VERY few original CEOs that made it to later date. The ones who do, however, help defined the company success and personalities (i.e. Microsoft, Dell, Oracle to name a few). No CEO wanted to be replace, even it means taking early money and retirement. People who found companies want to be part of the company, after all, they've donated their blood for what they believe!!

H.
Dr_Moose 12/4/2012 | 11:15:57 PM
re: VCs: 'We're Not Broken, Dammit!' Alchemy, thanks for the input - Keeping trying, learning, and not giving up, and not getting bitter. It's much easier to get bitter and blame the other guys. Maybe I'm just an optimist but I actually believe that that is what it takes to be an entrepreneur. If you want to make guaranteed money get a law degree open a law practice. Might be right for some people, but it is my idea of hell.

Moose

Yea, and the excuse in an up-market was they have to have the "exit" CEO. Who then brings in "his" team, axes the founders, flushes the common shareholders, takes a pittannce percentage of the VC's share.

I'm on my 6th startup. At first three of them, the VCs changed the management team and I didn't end up with a dime. In my experience, VCs hire total morons as replacement CEOs. They lack the drive. They lack the vision for the company. They load up the executive staff with their incompetent cronies. I've gotten much better at picking opportunities where the management team isn't likely to get swapped out by the VCs and I've had some success with my more recent startups.
BobbyMax 12/4/2012 | 11:16:02 PM
re: VCs: 'We're Not Broken, Dammit!' VCs have help surface the worst in mankind. It manifests in our society in the form of excessive salary. stealing from the company, meritless hiring, lying about the products and performance, lying about the capability of the products, lying for the purposes of being acquired by another company, destablization of larger well established companies, no meaningful contribution or very marginal contribution from the VC funded companies, stealing of ideas from another company and presenting as their own idea. Almost all telecom companies have been cheated by the VC funded companies.

Most VCs are crooks abd very dishonest people. VCs raise money by presenting very rosy pictures to investors and loot of them their wealth.

These guys, simply because they have some money, think that they are technologists, markter, and a great deal of management and product developments. All the Wallstreet evils have emanated due to evil actions of the VCs. During the years 1999 -2001, the VCs and the operators of VC established companies have stolen billions of dollars. Foreign investors have lost close to $8.3 trillion dollars. This money was stolen by the US government through WallStreet.

Most of the corrupt activities have occured in California because of its ThirD World Country traits. A book on Rise,Fall and Deception in California would be most appropriate.

VC funded start-ups have participated in insider tradings and other corrupt activities. I cannot describe it all in the short time I have.



skippy-spanker 12/4/2012 | 11:16:02 PM
re: VCs: 'We're Not Broken, Dammit!' Yah, 10-20 years of Communist rule in California would fix things right up.
alchemy 12/4/2012 | 11:16:04 PM
re: VCs: 'We're Not Broken, Dammit!' Ya, you can find LP directly. They are called "angels"!

The problem is that angel investors are usually screwed by VCs in the first real round of funding. It's a pretty rare A or B round where the VCs don't try to dilute the angels down to nothing and just top up the employee pool. Most management teams just cave in to the VCs.
whyiswhy 12/4/2012 | 11:16:04 PM
re: VCs: 'We're Not Broken, Dammit!' I have come to appreciate that finding the right start-up is all a matter of timing and common sense.

Timing meaning right after the round the founding CEO/CTO gets replaced. Common sense meaning that's when VCs need talent, and are willing to pay (again) for it, because they have figured out the company is worth stealing, not just closing down.

So they will cut you a share, and you might make some money with it. Not as big as the founders got in Round 1, but the founders share is washed out and worthless.

Living and learning: So much for founding companies, vision, passion, drive, etc. Leave that crap to the next fool. Why not just be a replacement Cxx lackie for the VC's?

Less glory, less risk, more money. Smarter. Only idiots fight the system.

-Why
verstand 12/4/2012 | 11:16:04 PM
re: VCs: 'We're Not Broken, Dammit!' This is a good point! VCs will screw anyone before them including their VC collaborators who fail to "pay-to-play" in the shark tank!

Personally, I consider the VC business model is a clever one! Looking back to the dotcom bust, many VCs that lost big are those foreign VCs, particularly Taiwanese VCs who breath US VCs exhaust! Flocking can make money, but flocking as tail (This applies to later investors in an IPO!) will sure to loose money.
verstand 12/4/2012 | 11:16:04 PM
re: VCs: 'We're Not Broken, Dammit!' Likewise, I had the same experience! It all boils down to "control"! VCs fund you, they also take funds away from you! They install their "men" to control "their" money! They work with head hunters. Head hunters collect CVs from big name companies. VCs also keep their own list of "friends in residence"!
verstand 12/4/2012 | 11:16:05 PM
re: VCs: 'We're Not Broken, Dammit!'
The time you need them is either they are there waiting for you (for example your PI is Charles Lieber) or actively looking for you (for example you are Kevin Kalkhoven); or there is a gold-rush mentality among them (for example VCs in 1998-99)! Don't even dream that you e-mail your business plan you will be called! Spending time to find a good Chinese partner is probably your best way to find a LP!
verstand 12/4/2012 | 11:16:05 PM
re: VCs: 'We're Not Broken, Dammit!' Ya, you can find LP directly. They are called "angels"! If you have rich in-laws or friends, even friend of friends, you should approach them always first! Chances are your VC friends will tell you "We don't fund research! It belongs to the government!"

There are many Chinese, Korean, Indian and Jewish entrepreneurs found their angels from their own ethinic group of wealthy businessmen. VCs play very limited role in funding seed money! The typical time VCs jump in is when you have developed your protype and secured your first significant order. VCs love to fund your rampup, but actually you can do away without them at all!
alchemy 12/4/2012 | 11:16:05 PM
re: VCs: 'We're Not Broken, Dammit!' Yea, and the excuse in an up-market was they have to have the "exit" CEO. Who then brings in "his" team, axes the founders, flushes the common shareholders, takes a pittannce percentage of the VC's share.

I'm on my 6th startup. At first three of them, the VCs changed the management team and I didn't end up with a dime. In my experience, VCs hire total morons as replacement CEOs. They lack the drive. They lack the vision for the company. They load up the executive staff with their incompetent cronies. I've gotten much better at picking opportunities where the management team isn't likely to get swapped out by the VCs and I've had some success with my more recent startups.
verstand 12/4/2012 | 11:16:06 PM
re: VCs: 'We're Not Broken, Dammit!' Many think (and even believe) they are the chosen people, the prince of successful startups having the Midas touch and the know'em-all mentality. Their experience drove actually more startups into tailspin (with their out-of-touch technology understanding and ignorance on marketing) than saved any from crash.
whyiswhy 12/4/2012 | 11:16:08 PM
re: VCs: 'We're Not Broken, Dammit!' Moose:

Motivation schmo-tivation: exact opposite has always happened, and is still happening. Shows the stupidity of the whole VC-mindset/investment process, or maybe the stupidity/angst of the founders/entrepreneurs.

Starting a company takes money and talent and luck. Keeping it running takes more money and and more talent and more luck. Making it successful takes as much talent, money and luck as you can get.

So where in that process did talent get de-valued? Market forces? So there is less of a payoff, so the money-side has to get 100% of whatever exit there is? Because the un-employment rate is high, so you can get cheaper talent?

Yea, and the excuse in an up-market was they have to have the "exit" CEO. Who then brings in "his" team, axes the founders, flushes the common shareholders, takes a pittannce percentage of the VC's share.

Up market, down market, it's all the same game: steal it.

-Why
Dr_Moose 12/4/2012 | 11:16:11 PM
re: VCs: 'We're Not Broken, Dammit!' "I also have a better idea of what to look for in terms of liquidation preferences, anti-dilution rights, board control, etc etc. Nothing like learning the hard way."

Dr. Moose, we are listening, go ahead and elaborate bit more ...
***

any situation where the market crashes like we saw the last few years - and the whole team, founders, key people, everyone - looses any equity incentives, and then if there is further funding where all is washed out - is a recipe for disaster. This topic has been discussed a bit on the boards - the situation is such that entrepreneurs turn into employees effectively. Anyway not an easy or productive situation. I think a VC with experience and non-lemming personallity would see that and take steps to keep the team motivated. I guess I have not heard of this happening in the last 1-2 years though.
Dr_Moose 12/4/2012 | 11:16:11 PM
re: VCs: 'We're Not Broken, Dammit!' Avoid entrepreneur turned VCs. They are the worst!

verstand, what kind of experiences did you have with entrepreneurs turned VCs? why do you think they are the worst? (I have some evidence that this may not really be true, i.e. I know some non-entrepreneur VCs that were really bad ...)

Moose
st0 12/4/2012 | 11:16:14 PM
re: VCs: 'We're Not Broken, Dammit!' (1) keep a day job (no IP exclusive requirement type job)
(2) work 22 hr a day for both jobs
(3) keep burn rate at minimum
(4) need 3 to 5 good key partners (tech/market, sales/accounting/tech plus clean "lady")...
(5) resist VC big money or promise as late as possible and hold on control as long as possible....(no IPO).
(6) make name before VC lay hands on...
(7) willing to walk away when the deal is too good to be true...

-st
dwdm2 12/4/2012 | 11:16:15 PM
re: VCs: 'We're Not Broken, Dammit!' "Is there a way to get funding directly from the limited partners rather than going throught the VCs?"

Sure there is; you just have to find the right partner...

Cheers
cyber_techy 12/4/2012 | 11:16:16 PM
re: VCs: 'We're Not Broken, Dammit!' Is there a way to get funding directly from the limited partners rather than going throught the VCs?

ct
BobbyMax 12/4/2012 | 11:16:26 PM
re: VCs: 'We're Not Broken, Dammit!' Corruptions and dishonesty perpetuated by the VCs have broken the back of America, its investors, and WallStreet. They do not have any special expertise in business, technology and marketing. Yet, when examiing a given proposal rthey pretend their expertise in all of the areas mentioned above. This is the most bothersome aspects of their character. They have funded incompetent companies and sold these coimpanies to larger public companies baseed on lies and other propoganda mechanism available to them.

The VC corruption is more visible in California than any state in the union. It will be a good to compile a list of the companies and trace their lives. The corruption became so rampant that the third world country VCs like India became much more adept in cheating than any other community.
The Indian VCs also misrepresented the qualifications of their team members.

I must warn that the same thing is going to happen the biotech industry. In spite of limitations placed on the HiB visa, there are close to half a million "software engineers" still living in the US.
PO 12/4/2012 | 11:16:28 PM
re: VCs: 'We're Not Broken, Dammit!' I don't know that the VCs have any magic beans any more than the rest of us do. At the end of the day, they're trying to make informed decisions but their best information comes from people they trust.

Too bad the people they trust have their own self-interest and their own limitations. Too often those they come to trust most are not the most informed or able -- just the best "VC politicians".

How many (well, at least among us North American folks) recall how the Mary Tyler Moore show ended? And how many thought the execs fired the wrong folks?

[For those who don't know: the storyline was that the TV station's newscast ratings were down, so the execs decided to fire the entire newsroom *except* for the (buffoon) news anchor.]

Sometimes it's hard to see the 'logic' which the decisionmakers use. Sometimes there is none.

The decisions are all pretty easy until they're tough. While I'm sure I would have made different mistakes than the VCs I've seen, I can certainly understand the thought processes which led them to the mistakes they have made.
verstand 12/4/2012 | 11:16:30 PM
re: VCs: 'We're Not Broken, Dammit!' st,

There is no way you can tell which VC is "good" in anyway you'd like to define what "good" is! Just try to look for them; use shot-gun approach. Word of mouth is good. I like to look for those "active" VCs. Ask how many startups they have funded in the past 4 quarters. Many widely perceived "good" VCs are running out of steam and aging amazingly fast!
verstand 12/4/2012 | 11:16:30 PM
re: VCs: 'We're Not Broken, Dammit!' Speaking from my own personal experience, VCs like to flock! They simply do not have "confidence" in their proclaimed tech area. This explains why they have to flock and prefer "veteran" entrepreneurs and those guys from big companies with big titles! Actually, there are more money out there than good cases. If you believe you have a good case, you should shop among VCs for the best deal! Reject "this is the way we do business!"! Remember, no VC can survive without good results! Avoid entrepreneur turned VCs. They are the worst!
st0 12/4/2012 | 11:16:30 PM
re: VCs: 'We're Not Broken, Dammit!' "startup-shutup"
====
start up do have their place, very important place in all the high tech field. Look at Cisco, Apple, even Microsoft... all three of the examples do contribute the growth.... The people buidling these companies did not rely on the external market to make money, but driven by the need for application can make their own life (or a group of geeks life) easy. Money making came after the technology development.... Just think about the Bill Gate did his market study at the small hotel in AZ at the time... I am sure it would be NO GO for his software (how much he can sell his software to few of the geeks with premitive computer box with switches?)...I guess most of VC never learn (few of the good one out there... how could you differentiate them from the others?

-st
st0 12/4/2012 | 11:16:31 PM
re: VCs: 'We're Not Broken, Dammit!' "n my mind, the key to a successful startup is to have a team that has the product marketing savvy to pick a product that nobody else is building and where there is actually a market for that product. "
====
unless you have the set of skills in house, identify a product in need is easy part. sucessfully produce it at low cost and consistent quality and large number would be the key. How many start up got prototype and concept done fut went into GR and MFG and belly up? Over stated market driven start-up without knowing the details were the downfall of both VC and many CTO (too many top level management style.... hands free and head empty)...

-st
OpticOm 12/4/2012 | 11:16:31 PM
re: VCs: 'We're Not Broken, Dammit!' Being myself burned (badly) in some top flier startups, I dare to add a few ideas to the great ones already posted here.
In the first place the 3Ms should be in place:

Market, Management, Money:

-the management should be ABSOLUTELY top notch. No CTO, because having a CTO and VP with Engineering spells disaster. A good VP with Engineering and that's it. The exec team should have worked together before, i.e., if they survived in another company before without killing each other, they will probably do it again.

-money should come from top VCs. Second or third tier VCs will almost always guarantee disaster to a company. They should bring to the table connections and ideas not only $.

-market. A startup should be innovative in the first place, because that is their only differentiator. They can neither adopt operational excellence nor absolute customer satifaction as strategic model, therefore they should create a huge innovative barrier to entry, to count in the market place.

And LUCK....
startup_shutup 12/4/2012 | 11:16:31 PM
re: VCs: 'We're Not Broken, Dammit!' Similarly I question the appointment of all
these directors in startups. It should be VP
of engineering followed by senior engineers.
I would be skeptical of startups trying to
recruit managers from big companies. They are
just building empires like

# Five managers used to report to me
# In chanrge of 80 engineers

Good that so many stratups have been shut down.
Bullshit can take them to the top but it would
not keep them there -- time will be the judge.
st0 12/4/2012 | 11:16:32 PM
re: VCs: 'We're Not Broken, Dammit!' "I don't agree CTO is the key. I think a good combination of VP of Engineering, Operations is required. Most of the CTOs I know are just "ideas" guys who can't really deliver anything anyway."
======
Well, if your idea of CTO is the "just ideas guys", sure he/she would not be the KEY.

CTO should be the one have vision and know the industry road map well. Could find the realistic fit of his company nitche in the road map, and planning it accordingly (long term vision of market share and pricing for example). Too many CTO of the start-ups were someone from big company, the start-up try to use the name to boost up managemnet portfolio ready for M/A. Got little or no knowledge of how the technology really work (could care less... just collect big pay check and smile pretty...).

-st
alchemy 12/4/2012 | 11:16:32 PM
re: VCs: 'We're Not Broken, Dammit!' Too many CTO of the start-ups were someone from big company, the start-up try to use the name to boost up managemnet portfolio ready for M/A. Got little or no knowledge of how the technology really work (could care less... just collect big pay check and smile pretty...).

In my experience, the CTO slot is frequently occupied by the founding engineering VP who subsequently found his level of incompetence as the team grew.

In my mind, the key to a successful startup is to have a team that has the product marketing savvy to pick a product that nobody else is building and where there is actually a market for that product. You can have the best engineering team and engineering management in the world and fail horribly if you build either a me-too product or the wrong product. The only way to make customers take the risk of buying from a startup is if there are no alternatives.
atmguy 12/4/2012 | 11:16:33 PM
re: VCs: 'We're Not Broken, Dammit!' >>4. VCs focus on entrepreneurs who made money for them before as this is perceived to lower risk. While the team is important, my experience is the only guy who matters up front is the CTO - if he is loser, the company is DOA. We all know that the all-star team is hardly the ticket to success and quite the opposite if egos get in the way.

I don't agree CTO is the key. I think a good combination of VP of Engineering, Operations is required. Most of the CTOs I know are just "ideas" guys who can't really deliver anything anyway.

dwdm2 12/4/2012 | 11:16:34 PM
re: VCs: 'We're Not Broken, Dammit!' "... burned entrepreneur who still hopes that we can survive until the next upturn ..."

If you are burned, can you still be an entrepreneur? Being failure once or twice is necessary evil for you earn the experience.

The upturn is near. Question is are we ready for it? Non-preparedness will only delay it further ...

Cheers
dwdm2 12/4/2012 | 11:16:34 PM
re: VCs: 'We're Not Broken, Dammit!' "I also have a better idea of what to look for in terms of liquidation preferences, anti-dilution rights, board control, etc etc. Nothing like learning the hard way."

Dr. Moose, we are listening, go ahead and elaborate bit more ...
laserbrain 12/4/2012 | 11:16:34 PM
re: VCs: 'We're Not Broken, Dammit!' >>4. VCs focus on entrepreneurs who made money for them before as this is perceived to lower risk. While the team is important, my experience is the only guy who matters up front is the CTO - if he is loser, the company is DOA. <<

Wow is that ever a narrow-minded view! CTO?! Because the execution of the ideas isn't nearly as critical as coming up with them in the first place. Nor is signing the partners to buy the damn thing.
Dr_Moose 12/4/2012 | 11:16:36 PM
re: VCs: 'We're Not Broken, Dammit!' sure it is not perfect, just I was suprised after being away for a few months that quality of the posts seemed to have improved ... particularly when it comes to the subject of VCs where many people could spew un-ending insults ...

In the end (after some "interesting" experiences myself not necessarily helping my view of VCs) I still believe a mix of entrepreneurs and *good* VCs is important. I will certainly try to apply a higher selection standard in the future (in case I ever have a new opportunity that warrants raising VC money again). I would certainly look for a VC with:

- experience
- track record of sticking through a company in tough time
- some technical competence, i.e. a technical degree or track record (even if it was a long time ago) that was actually product oriented
- one that had at least some idea in hell of what we are actually trying to develop in our product

I also have a better idea of what to look for in terms of liquidation preferences, anti-dilution rights, board control, etc etc. Nothing like learning the hard way.

Moose
btierney 12/4/2012 | 11:16:36 PM
re: VCs: 'We're Not Broken, Dammit!' i also get a kick out of pre-pubescent VC's who sit on BODs and "adults" have to cowtow to them...
Dr_Moose 12/4/2012 | 11:16:37 PM
re: VCs: 'We're Not Broken, Dammit!' Hey all, I have been going to Lightreading only occasionally over the last few months, and I have to say - the posts are really getting better! No inane personal attacks! excellent. This may be a real indicator of darwinian improvement in this industry .... and I really enjoyed / mostly agreed with the comments.

(I'm a burned entrepreneur who still hopes that we can survive until the next upturn - very similar experiences with BODs and VCs as reflected in these posts)

Dr. Moose

Flower 12/4/2012 | 11:16:37 PM
re: VCs: 'We're Not Broken, Dammit!' ... all your base are belong to us.

(PS, what do you mean no personal attacks ? You should read more carefully. Still a lot of nonsense going on these forums).
BBBoa 12/4/2012 | 11:16:44 PM
re: VCs: 'We're Not Broken, Dammit!' optical:

You nailed it! However in a VC's defense, 99% of them are money managers, no more no less. To think of them as "technology visionaries" or somehow having a pulse on the telecom/technology sector is mostly a joke. I'm sure if their LP's new how clueless some of these people are, they'd flip!

Don't get me wrong, there are certainly some very good VCs out there with a real operational background and can truly provide a young start-up with valuable knowledge transfer. Heck, some can even open up doors for you (what a concept!). If you can assemble your Board with these types, you're well on your way to a successful outcome and can enjoy yourselves in the process.

Unfortunately, the majority of the one's I've worked with have no real sense of the time, effort, sacrifice and long hours it takes to work deals and close business with a telecom carrier. I've even managed to make these folks some decent coin, but it was more pain than it was worth.

BBBoa
alchemy 12/4/2012 | 11:16:45 PM
re: VCs: 'We're Not Broken, Dammit!' 9. believe a start-up could developed a carrier-class platform and be in beta within a year?

You mean you can't? *grin*
whyiswhy 12/4/2012 | 11:16:45 PM
re: VCs: 'We're Not Broken, Dammit!' The one thing I see is the fear and avoidance of hard work. VCs (and some CEOs too) still believe they can build overnight piles of cash...just find the right deal.

The truth is only one or two optical companies are making a net profit these days. And if so, it's not because of optics.

So VCs are pulling their cash from perfectly good, but not spectacular, optical companies. If they would skinny down, pinch out pennies and sell product for awhile, they could grow them. Probability of reaching breakeven 80-100%, cost handful of Millions.

Instead, they invest in highly speculative medical start-ups still in early product development stage. Probability of successful development, (let alone FDA approval and reaching breakeven): 1%, cost hundreds of Millions.

And that mindset is the problem. It's pervasive.

-Why

dodo 12/4/2012 | 11:16:47 PM
re: VCs: 'We're Not Broken, Dammit!' There are and were too many pretenders and opportunists jumping in the same band wagon.
btierney 12/4/2012 | 11:16:48 PM
re: VCs: 'We're Not Broken, Dammit!' Good one....most of the VC's i've met think they walk on water. If they are so smart why did they
1. over fund every segment?
2. Over fund every sub segment?
3. Over fund every sub sub segment?
4. Double dip in all the above?
5. make the same mistake in storage?
6. make the same mistake in wireless?
7. actually believe CLECs had any chance in hell?
8. actually believe that CLECs would buy from start-ups?
9. believe a start-up could developed a carrier-class platform and be in beta within a year?
10. believe a company can be successful with a first time CEO and first time VPs?
nbwaite 12/4/2012 | 11:16:49 PM
re: VCs: 'We're Not Broken, Dammit!' Currently, overwhelmingly, the VCs just do not know
what to do.

They are afraid to lose the money of the partners,
including the limited partners (LPs). Yet, the VCs
don't really know how to make money. In some of the
language that they like, they don't have a good
'value proposition' in their 'space'.

Time to send some VC Care Packages: For the tears,
one (1) towel, for those feelings of insecurity, one
(1) pink blanket, for pleasant bedtime reading, one
(1) copy of 'How to Succeed in Business without
Really Trying', to rebuild personal values and
self-esteem, one (1) copy of 'Everything I Needed to
Know about Business I Learned in My MBA', and for
much needed recess exercise, one (1) eight (8) ounce
bottle of Wonder Bubble.

Copies of real estate ads in the Hamptons and
reviews of the new Mercedes Maybach should be
regarded as too depressing.

During the last rising of bubbles, 'Forbes' ran an
article with an interview of a VC with the advice:
"Never be between a VC and the door when the lock up
period is over." And that was exactly the point:
The VCs were selling junk and knew it.

Mostly the junk cost a lot of people a lot of money.

Some serious observers have concluded that we cannot
have rising bubbles again until we have a lot of
investors that don't remember, and that may be
another 20-30 years. I.e., bubble years were 1999,
1969, 1929.

Here in the US, it is true that we have a lot from
the research community, a lot of ambitious and
educated people to work with the results, terrific
supply of all routine inputs needed for such work, a
sufficient legal system, big active reasonably well
managed stock markets, lots of investment bankers,
lots of investors with lots of cash, huge
collections of potential customers that still
believe in the possibility of progress and ready to
buy products and services that can deliver.

So, there should be opportunities to grow valuable
businesses; the VCs should be able to do well.
That, with these circumstances, the VCs do not know
how to make money is currently one of the grand
tragedies, extracting defeat from the jaws of
victory, of our society.

Alas, the US VC industry did not really come clearly
from 'fundamentals'. Instead, over the last 40
years, the industry was at times a wild stab,
accidental, lucky, opportunistic, etc. And the VC
industry we have now is left over from such
nonsense.

The basic problem is that the VCs don't want to look
at fundamentals, not about research, technology,
people, business, or revenue and earnings. The
fundamentals are too boring, too pedestrian. The
VCs want 'more'. Sometimes they did get more, e.g.,
with bubble blowing (where W. Buffett remarked that
there are some severe "timing problems") and
sometimes they got less, e.g., now.

Also, lacking respect for the fundamentals, the VCs
are lacking solid criteria and have been drifting
and have gone heavily for silly thinking comparable
to palm readers, psychics, the miracle healing
powers of nature, tea leaf reading, rain dancing,
etc. They place huge faith in trivial coincidences
and meaningless patterns. They follow fads. They
act in flocks and herds. They are too often like
silly Watson in Holmes stories: "I can vouch for
him; he played wing and three quarters at my
school." Reeking nonsense.

Darwin didn't argue all the details of flaws; he
just said that the system tends to weed them out.
Soon most of the VCs will have to make the money
grow or the limited partners will quit investing and
the VCs will get weeded out.

For making the money grow, likely the VCs will have
to return to fundamentals:

First they will have to be content with making money
from valuable businesses, ones that are valuable
because of high, hopefully rapidly growing, revenue
and earnings from honest accounting. Horrors that
success in investing should come to such things!

Instead of making money, the VCs are still hoping,
hoping, everyday look eagerly at the 'WSJ' for
signs, hoping, for some glimmer of 'action' on the
Nasdaq that will indicate what the suckers, uh,
investors, can be tricked with again soon.

Well, show the investors a company with solid
defensible powerful technology valuable for the
customers, good barriers to entry, solid position in
a large market, and high and rapidly growing revenue
and earnings, and then ask if the investment
bankers, institutional investors, and Nasdaq investors
are interested. Gosh, that a VCs should actually
have to accomplish such things just to get a new
yacht!

The VCs commonly say these things are important;
problem is, they don't want to do the work of
actually accomplishing them.

Second, to play a role in building such businesses,
VCs will have to pay close attention to the actual
business plans and why there is promise of revenue
and earnings. The emphasis on technology is
appropriate, but the VCs will have to pay close
attention the new power and value of the technology,
close enough to tell the difference between, say, a
new source of energy and perpetual motion. Again,
horrors!

VCs might actually have to read the technical
sections of business plans and go for due diligence.
Unrelenting horrors!

We know quite well how to evaluate technology: We
have excellent lessons in how projects are reviewed
by the US DoD, DoE, NIH, and NSF. Until VCs adopt
such review techniques, they won't be able to tell
powerful and valuable technology from perpetual
motion. Being able to judge the power of the
technology is just crucial. They are, and will
remain like the cat that walked on a hot stove and
will never walk on any stove again, hot or not.

That is, hearing about some powerful new technology,
e.g., in an 'elevator pitch', a standard VC reaction
is: "That's a good technical solution." What they
mean is: "That's sounds technical enough; I don't
know or care if it's perpetual motion; I don't care
if it's valuable; but you haven't told me what
current fad will cause the suckers, uh, individual
investors, to buy stock in such a company now."
That is, they are just looking for a 'quick flip'
and not at building a solid company.

For paying attention to the technology, the VCs are
'challenged': Nearly none of the VCs could get a
faculty position in the engineering school of a
research university, read, write, or referee
research papers in engineering, get hired as
either a worker or a first level manager by a CTO or
CIO, or get hired as a problem sponsor for R&D by
the US DoD, NIH, or NSF. Not good.

Last, the VCs will have to give up on their 'Weekly
Reader' version of business expertise: The worst of
these is their standard attitude that "Marketing is
everything". This attitude goes back to the 'white
shoe' and British upper class attitudes of respect
for banquet small talk skills, contempt for actual
work, and fear of anything technical. If -- as
usually intended for the technology -- the product
or service is really valuable for the customers,
then quite routine efforts in marketing will usually
be successful. We should be suspicious about claims
of especially high abilities in marketing: (1) What
is taught in marketing in the business schools
ranges from simple and routine down to unimpressive.
(2) There are no real 'science' or 'engineering
principles' of marketing.
chipsischips 12/4/2012 | 11:16:49 PM
re: VCs: 'We're Not Broken, Dammit!' 10. Primary reason they are a VC is they got an MBA from Harvard or Stanford.

9. Primary reason they are a VC/EIR is they had one successful start-up in the 95-00 time frame.

8. VCs obsessively invest in spaces; while it takes time to gain expertise in an area to add value, they are looking too much at supply & demand of the equity markets as to where they are going to get the best return. During 95-00, that philosophy worked wonders when there were liquidity events in hot sectors that returned 50X or more; it does not work today where IPOs as an exit have been shut down.

7. VCs have been burnt by their own poor judgment investing in certain sectors in the past and refuse to invest in anything that remotely smell like it regardless of its merits.

6. VCs focus too much on the technology up front, even though they claim to focus on the business model.

5. VCs are looking too much for a reason not to invest - I guess with the big oversupply of VCs, they are trying to prove to their LPs that they are really busy finding deals when they are really just killing time.

4. VCs focus on entrepreneurs who made money for them before as this is perceived to lower risk. While the team is important, my experience is the only guy who matters up front is the CTO - if he is loser, the company is DOA. We all know that the all-star team is hardly the ticket to success and quite the opposite if egos get in the way.

3. VCs invest in their existing dogs simply because those companies have customers and revenue, regardless of their longer term viability. The old saying is when you get a bunch of dogs together, you get a kennel, which is what the VCs currently have. Too much saving face and not enough focus on getting their LPs a decent return.

2. The overriding reticence among VCs means they are missing on the great investment opportunities now that will provide the liquidity events in the second half of this decade.

1. Most VCs really don't get it even though they claim they do. The 10-15% who do will be the survivors in 5 years. The rest will lose their job anyway and will have a lot of pissed off LPs.
TheAce 12/4/2012 | 11:16:50 PM
re: VCs: 'We're Not Broken, Dammit!' The illness of the VC industry people talk about is only a matter of the past 5-7 years. It was not always so. During the bubble, many jumped on the VC wagon and as a result we got many inexperienced people sitting on BODs of high technology companies. In addition, everybody makes money in a bulls market (or a bubble) so many of these rookies thought they knew it all. This led to arrogance, misbahvior, greed etc. The VC funds are finanical intermediaries, in this sense they are much like brokers or bankers but the VC industry lacks the ethics and codes of conduct of banking or brokerage. Hopefully this downturn will weed out those that don't fit and they will go back to consulting, accounting, law, finance, etc.
Building hi-tech companies is a game for experienced professionals, most of them simply aren't. As for entrepreneurs, sorry to say, but there were band wagoners there too. Had the VC guys been professional they would have not funded unworthy start-ups in the first place.
Keep the faith, we will be back!
Keep the faith, we will be back!
Keep the faith, we will be back!
green 12/4/2012 | 11:16:50 PM
re: VCs: 'We're Not Broken, Dammit!' right on whyiswhy !!

VC's think they can demand slave labor at pitiful salaries b'cos of the bad economy. they don't realize that products suddenly turn buggy and deadlines are missed when employees are unhappy !!!!
Fortunecookie 12/4/2012 | 11:16:51 PM
re: VCs: 'We're Not Broken, Dammit!' What else do you expect from MBAs? I just don't understand why MBAs got so high.
st0 12/4/2012 | 11:16:52 PM
re: VCs: 'We're Not Broken, Dammit!' "A VC isn't going to make any money if their portfolio companies spend their money like drunken sailors."
=====
Well, VC and drunken sailors are two of same kind (which one is the lesser evil?). The problem for the innovation and high risk research currently funded by VC or large companies are alike: (1) need small funding to test the feasibility of the concept (2) need medium funding to assess the market timing. The downfall of VC and large company managers are common: short sight on return (VC the blind try to MAKE a business, not innovation. The large company is swinged by market driven research.. ). Look at the key innovation, including cisco, linux, etc.etc. it all started feasibility with OTHER funding for the initial research, the VC only get into later for the 2nd stage...

Drunken sailor were a group of oppotunists, trend followers to make few quick $ and build a company for sale (no intention to stay in business long). They are mirror image of the VC in different light.... Now, after the bubble, both side don't trust each other ... well, some of the good real innovation become suspect as well... Too bad.

-st
whyiswhy 12/4/2012 | 11:16:55 PM
re: VCs: 'We're Not Broken, Dammit!' The problem with the VC game of late is they've gotten so greedy as to take virtually all the incentive away from common stock holders.

They thought they could get away with it because everyone "needed the job" in a lousy economy.

What they forgot is the fundamental business proposition of a venture: founders bring the muscle and brains, VC's bring the money, they share equally in the payoff. Neither is worth more: they are both needed.

When VCs hog all the upside with down rounds and bridge loans under the excuse the market is tough, the founder becomes an employee, with zero incentive to make the VC's money back: it's just a job.

So the lesson to VC's is you have to keep the founders well incentivized to make you both money at all times, regardless of market, or you might as well just walk away and get a job selling vacuum cleaners, if you can.
OptoScot 12/4/2012 | 11:16:55 PM
re: VCs: 'We're Not Broken, Dammit!' The issue over here in the "auld country" is that when VCs do invest ( which is rare in the optoelectronics sector) they tend to drip feed companies money.

Initial rounds for start ups can be less than $1m and achieving second round funding is becoming more and more difficult but when it happens may be no more than about $5m.


OptoScot 12/4/2012 | 11:16:56 PM
re: VCs: 'We're Not Broken, Dammit!' Had to laugh at this one... Here in Scotland and in the UK generally VCs are so thin on the ground that some have been heard to say "what's a VC?"..

If you US chappies think you have too many perhaps you'd like to send them over here :-)
Curious George 12/4/2012 | 11:16:56 PM
re: VCs: 'We're Not Broken, Dammit!' Completely agree regarding big company research, cuts have been brutal and resulted in wholesale dismantling of capability, not simply a downsizing. Typically the programs that remain in central research are overly influenced by the business units since the only work they will support is that which is relevant to them on a very short time scale.
alchemy 12/4/2012 | 11:16:56 PM
re: VCs: 'We're Not Broken, Dammit!' Thoise who believe in big corporation "research" probably believe in unicorns, also. Big corporations have consolidated so brutally around legacy products that there is *very* little going in the way of new programs - most of them were killed off very quickly as the downturn began.

Agreed. Big companies also no longer have inflated stock prices so the amount they're willing to pay to aquire new products. The 'innovation' from VCs is bound to be winding the clock back 15 years and insist that startup companies live frugally again. A VC isn't going to make any money if their portfolio companies spend their money like drunken sailors.
Sibylle 12/4/2012 | 11:16:56 PM
re: VCs: 'We're Not Broken, Dammit!' Yes we chappies have too many clueless VCs and yes we can send them over. Provided you also agree to accept our unmatched collection of politicians. For you troubles we will relieve you of your entire herd of relatively sane mad cows. Deal ?
=======================================
Had to laugh at this one... Here in Scotland and in the UK generally VCs are so thin on the ground that some have been heard to say "what's a VC?"..

If you US chappies think you have too many perhaps you'd like to send them over here :-)
Sisyphus 12/4/2012 | 11:16:57 PM
re: VCs: 'We're Not Broken, Dammit!' > .. research dept of big corps ..

Thoise who believe in big corporation "research" probably believe in unicorns, also. Big corporations have consolidated so brutally around legacy products that there is *very* little going in the way of new programs - most of them were killed off very quickly as the downturn began. I think it's totally wrong to expect any disruptive innovation out of large companies for now, you'll just see very slight evolutionary improvements to the product line.
Sisyphus 12/4/2012 | 11:16:57 PM
re: VCs: 'We're Not Broken, Dammit!'
Funny to see McQuillan and the other NGN folk acting so superior these days. They just know better, always, eh? He was actually hyping the loudest just a few years ago. Which makes his new -and the show's- conservative front all the more irritating, I think. I attended NGN for several years, and sometime during the conference last year decided my time was better spent elsewhere, packed up and left.

The NGN insiders complain about the lack of innovation whenever they get a chance, but organizes the conference around the same crusty old theorems, the same ideas and with the same people. How's that for innovation? At this point in time, they wouldn't know what's "next generation" even if it had a neon sign on it.

As to the theory that large companies are still funding large, innovative, capital intensive R&D... it is a joke, isn't it? Or do they really lead such a sheltered existence? Get out of the Olde Ivory Tower, really.

In a nutshell: it's NGN that's gone stale, not the networking world.
dwdm2 12/4/2012 | 11:16:58 PM
re: VCs: 'We're Not Broken, Dammit!' "... weeding out needs to occur in the VC space and let's get the true builders of companies back in the reins at the VC firms."

Builder of comanies usually lack capital and VCs usually lack the skill to innovate new technology. Thats why these two often gets married to produce by complementing each other. In recent days it seems like VCs are telling what to innovate simply because they are writing the check.
bw 12/4/2012 | 11:16:59 PM
re: VCs: 'We're Not Broken, Dammit!' The question is if the innovation that making impacts will come from start-ups backed by VC, or now will come from research dept of big corps. I think short term, start-ups are having difficult times to push technologies to fruition, but longer term, they will be back, just a matter of time work off the excesses. If history is of any guide, there is not the first time for bubbles to burst, and cause a lot of pain in the process..But come back they did..
realdeal 12/4/2012 | 11:17:00 PM
re: VCs: 'We're Not Broken, Dammit!' said his firm has invested in "34 new companies in the last 48 months."

Now we know what keeps the VC's busy- it takes time to close down 34 new companies but I imagine this can be accomplished over the next 18 months.
joe_average 12/4/2012 | 11:17:00 PM
re: VCs: 'We're Not Broken, Dammit!' Optical hit it right in the bull's eye.

The BoD at my old start-up were incredibly unimpressive. The best one, from a black humour perspective, was a newly minted MBA who had zero experience in life much less Telecom.

Of course once the valutions started going down and the VCs owned the majority of the stock, they made the obvious (remember: black humour) choice: they made this puppy the CEO. You can guess the sad result - no more company although the CEO still is drawing a salary until absolutely all the money is gone. Amazing.

I am in total amazement that there hasn't been a blood-letting in the VC community.

dwdm2 12/4/2012 | 11:17:00 PM
re: VCs: 'We're Not Broken, Dammit!' 'Where's the innovation in the VC World?'

I am not sure if this is the right question to ask. Traditionally, VCs want to buy innovation with their check.
optical 12/4/2012 | 11:17:01 PM
re: VCs: 'We're Not Broken, Dammit!' In regards to VC's, I have to tell you based on my own personal experience that I'm not impressed with about 99% of them. I was always under the impression that a BOD was an group of people who where in a role to assist your company to be successful. Unfortumately, my experience has been one where I actually view the VC's to be destructive due to their true lack of unstanding of how telecom carriers operate, or it's a hot shot VC who made a killing with their own start up during the bubble days and now they believe they have all the answers, when in truth they were just at the right place at the right time...they were lucky! I really believe that a weeding out needs to occur in the VC space and let's get the true builders of companies back in the reins at the VC firms. I'd be intested in hearing the thoughts of those who have also interacted with the VC community over the past 4 years.
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