I sent around the Radar back-channel a pointer to Techrunch’s coverage of the new Charles River Ventures quickstart program, which abandons traditional early stage venture investing in favor of bridge loans at a discount to a later venture round, if any.
I’m all for small-scale seed investing, but as an angel, I’ve never been a big fan of this “discount from venture” approach, as it seems to devalue the risk that the early investor is taking. But more than that, it’s an admission of ignorance — a statement that “I don’t know what this is worth, so I’ll wait for someone else to figure that out.” It always seemed to me to be the approach of new and unsophisticated angels. So in some ways, for a venture fund to take that approach seems a bit backwards.
This move is not about what’s right for the entrepreneur, it’s about Odeo and
I spent some time on Sand Hill road last week and the refrain from every VC
I met was the same- this is a hits business and we just don’t know who the
winners are going to be any more. The old formula was one that they were all
comfortable with – get a proven team in a hot market and you’ve got a winner.
Then Odeo happened (CRV was the primary backer). Rockstar team, smoking hot
market, all-star angels — and it didn’t deliver the hyper growth traditional
VCs need for their return profile. YouTube on the other had was a
couple of junior guys from PayPal moving into a saturated market which had
never really panned out. $1.65B later, the VCs are scratching their heads as
to how this could happen. Looking out across recent wins, you don’t see
all-star proven teams. You see scrappy entrepreneurs long on ideas and
enthusiasm, but short on actual management experience like those at
Facebook, Digg, Flickr, etc.
So what’s a VC firm to do- spray and pray? If the odds of getting into a hit
deal are akin to hitting it big in Vegas, it’s about making a lot of bets.
This program aims to make 50 loans in two years between two partners. Those
two partners would historically make 2 investments per year, period.
The heart of the venture business is being able to separate signal from
noise, rolling up your sleeves and working with the entrepreneur to build
something successful. Is there any coincidence that Yahoo, Google, YouTube
and so many of these “hits” have come from a handful of firms? Certainly
timing and luck play a huge part in our business, but minimizing it to a
seat at a roulette table is a shame…
Part of the problem is that the VC funds are so large, they just can’t put enough money to work in the smaller investments that are appropriate in today’s agile development environment. The right answer isn’t to broadcast lots of bets. It’s to create a smaller fund, where the amounts to be invested match up to the needs of the entrepreneur, but the traditional VC values of careful selection and added value still count.
And for what it’s worth, it seems to me that there are sectors (think energy) where lots of capital may need to be deployed.