Backing Stupid Ideas

Posted on October 2, 2007
Filed Under Entrepreneurship, web 2.0 |

As managing director of Garage Technology Ventures, Guy Kawasaki funded all the really smart ideas he could find. None hit it big.

Is there a rim shot and laugh track to go with that statement…

Kawasaki is right about a number of the points he makes through this article. A lot of companies do require less capital and that throws a wrench in the traditional venture capital model, and it is difficult for investors to pick winners when intellectual property is less of a factor. Having said that, when has it ever been easy for venture investors to pick winners, and if it were easy would there then not be a lot fewer also-rans in any sector.

It is tempting to say that the venture capital model is broken but I do not think that is accurate, from where I sit the traditional VC model is forking.

On one side is the traditional big money in startup model, with a lot of IP and an ambitious business model. Many of these funds are also doing non-traditional venture activities, like PIPEs, and investing internationally. This is traditional venture capital and it’s not at risk, but as these funds have grown in size they are structurally incapable of doing small financing events.

I know from talking to a lot of my friends on this side of the business that they are struggling with deal flow, and in partnerships that feature older and younger generations there is a real gap between investors who look at many of these web 2.0 businesses as nonsensical. There is actually a good statistical basis for why these are not good investments for traditional VC firms, and that is the fact that aquisitions tend to be in the $30-40 million range, which doesn’t provide much in the way of return for investors accustomed to traditional venture economics.

The venture economics topic is another interesting one to explore and a number of academic researchers are doing just that. The findings are disheartening, suggesting that long term returns in venture capital basically track the NASDAQ over the same long term horizon. (Note: I’m trying to find the link for this). Furthermore, it’s no secret that the top 12 venture firms generate over half of the returns in the entire industry.

The second fork in venture capital is the resurgence of the angel investor, but not the traditional angel most epitomized by the rich old guy who in between rounds of golf puts some money into interesting startups found through personal connections. The new angel investor is less likely to be an individual, more often a small group of successful entrepreneurs who want to be actively engaged in their projects.

If your business requires a small amount of capital, let’s say less than $1m, to get started, this track is not only your best option from the standpoint of probability to getting funded, but also the contribution you will get from you investors.

Tandem Entrepreneurs is great example of this in action:

Tandem is a collection of entrepreneurs who have founded companies from scratch and taken them to liquidity. We love nothing more than building businesses, and now make it possible for like-minded people to take the entrepreneurial journey by funding their companies with both our time and money.

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