According to Robert Hendershott, a professor of private equity and entrepreneurship at the Leavey School of Business at Santa Clara University, venture capital is becoming obsolete for Web start-ups.
Reason #1: VC’s Risk/Reward Profile is Unsustainable
I think venture capitalists are becoming obsolete because their risk and reward profile became unsustainable.
VCs will admit that they are looking for the home run, if not grand slam, when looking at companies to invest in.
But the thing is, in baseball, you can only win if you are willing to take a walk, get a single, double, the odd triple etc. When VCs prospect (look at pitches - both proverbial and figurative), they are constantly looking for grand slam pitches and swings.
More often than not, doing that ensures that you strike out or take too many walks. In baseball, you can win by getting enough walks. In the world of VCs - where you’ve raised billions from pensions and endowment funds, you can’t “walk” (sit on your capital). Smedley Butler used to say that war is a racket. I think VC is a racket: Many earn management fees and don’t have any successes to show for it.
But instead of aiming for a number of 2-10x returns, VCs aim for the proverbial grand slam but end up striking out more often than not.
Reason #2: Binary Outcome - Grand Slam or Stop Playing Altogether
The larger reason why VCs have become obsolete comes after they have invested in a company. Speaking to an entrepreneur who initially shunned venture capital in favor of angel financing, he mentioned to me that VCs have a binary outcome mindset where it’s either “grow and win quickly” or “fail”.
VCs, I thought, were supposed to build companies that last and adopt a long term view. In practice, it’s the opposite. But whereas in baseball a team commits to playing the full nine innings and even go to extra innings to win, when VCs realize that their bet was misplaced, they simply take the bats and balls and go home.
This all reminds me of the Casey at the Bat poem:
In the poem, a baseball team from the fictional town of Mudville (implied to be the home team) is losing by two runs with two outs in their last at bats, but they think they can win “if only” they could somehow get “mighty Casey” up to bat. Two weak hitters manage to get on base, and Casey comes to bat with the tying run in scoring position. The beloved Casey, Mudville’s star player, is so confident in his abilities that he doesn’t swing at the first two pitches, both strikes. On the last pitch, the overconfident Casey strikes out, ending the game and sending the crowd home unhappy.
‘Nuff said.
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