Paul Graham talks about the demise of VCs. I could copy and paste tidbits, but then I’d end up pasting the whole thing. There is nothing earth shattering about this article, but it does explain how slowly but surely, on an almost deal-by-deal basis (without naming any, though), VCs are rendering themselves obsolete.
As someone who unsuccessfully pitched 10 or so VCs (and maybe another 5-10 angels, to boot) from January 2006 to May 2008, I’d say:
1- Not All VC Investments Are Alike
First and foremost, we have to be careful about taking lessons and realities of consumer media startups (that indeed probably don’t need VC) and apply it to all segments of the industry.
2- Self-Serving? Yes. False? No.
It should be stated, that indeed, Graham isn’t a VC, but is an investor. As such, sure, he stands to gain from the VC-is-dead rhetoric… but I suppose he launched Ycombinator as a result of seeing VCs starting to look like dinosaurs.
3- Draconian Terms
VCs do themselves no favor with their draconian term sheet rules, which sort of explain why I was unsuccessful with at least half of those VCs I spoke to.
4- The Information Gap
VCs also got Google-envy, but Google is the result of a once-in-a-generation perfect storm that remains the only ad-supported technology startup that became a hit… a huge hit. But VCs typically hail from engineering, computer programming roles and companies, meaning that they just don’t get advertising. They really don’t. Hence why they wrongly backed a gazillion UGC/social media startups that will never see VC-worthy revenue figures, let alone a liquidity transaction.
This is what I call the information gap, ironic, seeing how VCs helped fuel the information age. I covered this in Understanding the Roots of VC Woes vs. Scapegoats. In other words,
- the credit crunch only exposed VCs bad investment strategies, it is not the cause of its downfall.
- the lack of IPOs have nothing to do with Sarbanes-Oxley, but rather, bad investments in idiosyncratic projects that no one really cares for (in the consumer media space, I stress, once again).
This probably explains why the other half of VCs I spoke to didn’t invest… because these geniuses (in a good way, of course), actually questioned the wisdom of creating professional video content (that marketers actually want) when you could have free user-generated content en masse (that no marketer wants to come close to).
Not that I’m bitter of course, or gloating, now.
By the way, how’s that investment in Crapstr.com coming along, pal?
5 - You’re Not Jack Welch
Lastly, the mantra of being #1 or #2 does not apply and is not relevant online. This is rubbish mentality that focuses good entrepreneurs to make bad decisions, only to see VCs pull the plug when they fall in love with the latest “it” fad. Sometimes it’s good not to follow the crowd… and if the crowd ran towards the VCs (and jumped off a cliff) doesn’t mean you should too.
6 - Dirty Little Secret
VCs not only literally take in more than they give back…
But most entrepreneurs will tell you that most (not all) VCs don’t add all that much value, and figuratively contribute less than they take, as well.
The leaders in the VC community need to gather all of their constituents in a room and try to gain the credibility they’ve lost in entrepreneurs’ eyes. Frankly, I don’t think they can pull it off.
Prove us wrong.
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