happy chaos freedom machine

We do not think you’re different. We are not confident in your ability to establish strong relationships with companies. And we will probably not think of you when we need funding later on.

 Particletree » How Not to Pitch to a Startup .

For years I’ve talked to VCs when I’ve met them, and I have been uniformly unimpressed by them. It’s not surprising to me that the VC model is melting down. That model has been, as far as I can tell, the following:

1. listen to tons of startup pitches
2. look for the ones where the team seems the strongest and the business plan numbers mostly add up
3. invest in 10 strongest teams

That’s it. In the 90′s, the VC would then work to get one of the 10 to IPO, creating a massive return that would obliterate the losses from the other 9. After the dot-com bust, things got a little tighter with no public market exit, so they added another criteria to the evaluation of startups: would it be attractive as an acquisition for Microsoft or Google? Acquistions brought in smaller multiples, so they tried to get that exit quicker and with a larger proportion of their portfolio companies.  

My argument to the VCs I’ve spoken with over the years has been that adding a modicum of intelligence to the placing of the bets would marginally increase the percentage of “hits” in the portfolio and therefore give the firm an edge over the market of other VCs. Too much thinking required has been the usual response, an attitude well in evidence in the story quoted from Particle Tree’s blog, above. 

The problem has been that money has been too easy to make for the VC, and therefore there hasn’t been enough incentive to work hard for it. Outsize returns have a way of doing this in any market – witness the current mess in the larger financial market. People got lazy.

It’s time to overhaul the way tech startups get funded and nurtured and scaled up. We need a system that acknowledges that the barriers to entry have dropped dramatically, that not every great idea needs to generate a 10 bagger exit, and maybe it’s unreasonable to think that the guy in the slick suit who can connect money to founders should automatically be awash in riches.