Comments on: The VC Model, The Funded, and The Problem With Associates http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/ Jack of All Trades, Master of Some Sat, 13 Mar 2010 13:19:05 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Sam Jew http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-492 Sam Jew Fri, 04 Sep 2009 07:11:47 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-492 6) All founders are willing to pay for professional services that add value sufficiently exceeding their cost. However the value VCs add to the innovation ecosystem consists of the money they bring to the founders, in service of their vision - not the other way around. If VCs happen to provide advice and contacts, great, but despite the plethora of amateurish magazine articles that have appeared out of the woodwork in recent years to sully the thinking of the culpable masses with sheer nonsense, let us not lose sight of the broader reality here. 6) All founders are willing to pay for professional services that add value sufficiently exceeding their cost.

However the value VCs add to the innovation ecosystem consists of the money they bring to the founders, in service of their vision – not the other way around. If VCs happen to provide advice and contacts, great, but despite the plethora of amateurish magazine articles that have appeared out of the woodwork in recent years to sully the thinking of the culpable masses with sheer nonsense, let us not lose sight of the broader reality here.

]]> By: Chris Yeh http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-396 Chris Yeh Mon, 13 Jul 2009 02:59:34 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-396 1) Allow founders to take money off the table. Agreed. There is a misalignment of incentives; VCs want moonshots to maximize expected value, but the utility of one's first million is much higher than that next million. 2) Have standard Series A docs. Absolutely. 99% of the time, a plain vanilla termsheet should suffice. 3) Let founder/CEOs continue to run the business. This depends on the founder/CEO. Many times, the person who can get the company off the ground does not have the skills to lead it to success. The correct answer should be, "I'll be happy to bring in a CEO if we're all convinced it will increase expected value for everyone." 4) Be okay with smaller returns. I disagree that VCs should be satisfied with smaller returns, but liquidation preferences above 1X are unnecessary and abusive. 5) Reduced management fees and increase carried interest. I totally agree with this one; management fees incent bloated funds. And if you really believe in your investing ability, you'd want to boost carry as much as possible. What %s do you think would work? 6) No founder will ever go for it. 1) Allow founders to take money off the table. Agreed. There is a misalignment of incentives; VCs want moonshots to maximize expected value, but the utility of one’s first million is much higher than that next million.

2) Have standard Series A docs. Absolutely. 99% of the time, a plain vanilla termsheet should suffice.

3) Let founder/CEOs continue to run the business. This depends on the founder/CEO. Many times, the person who can get the company off the ground does not have the skills to lead it to success. The correct answer should be, “I’ll be happy to bring in a CEO if we’re all convinced it will increase expected value for everyone.”

4) Be okay with smaller returns. I disagree that VCs should be satisfied with smaller returns, but liquidation preferences above 1X are unnecessary and abusive.

5) Reduced management fees and increase carried interest. I totally agree with this one; management fees incent bloated funds. And if you really believe in your investing ability, you’d want to boost carry as much as possible.

What %s do you think would work?

6) No founder will ever go for it.

]]> By: Brandon Watson http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-394 Brandon Watson Wed, 08 Jul 2009 22:21:59 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-394 Chris!! So great to see you here. Hopefully we can make time next time I am in SFO. As for the right model, I don't have an answer. I have some things I would like to see VCs start doing: 1) allow foudners to take money off the table - having some money in my bank account doesn't make me lazy. it makes me greedy, and greed works as a motivator. 2) have standard series A docs for all deals - the amount of money that is wasted on early financings is stupid. 3) let founder/CEOs continue to run the business - asking them during the funding process if they are OK with stepping down is kind of lame. you just met them. besides, why risk disenfranchisement with the other founders/early employees? 4) be OK with smaller returns - having terms that require 4 and 5x deal pricing to force a change of control is lame. 5) make your money on the alpha - why you are basically locking up 20% of committed capital for management fees (2% a year over the life of the fund) is lame. Reduce the management fees and increase carried interest. 6) make founders pay for your services - take a smaller percent of the deal, but work on a retainer for your companies. this could supplement the reduced management fees, and makes sure that the founders know that it's encumbent on them to get max value out of the investors. i am sure there are all sorts of issues with this, but on the surface it feels better than giving up more of my company. That's just a short list. The single biggest problem I have with VCs is their ability to leverage themselves over multiple deals, but their insistence on the opposite for founders - a founder can only work one deal at a time, and must be working 24 hours a day. Chris!! So great to see you here. Hopefully we can make time next time I am in SFO.

As for the right model, I don’t have an answer. I have some things I would like to see VCs start doing:

1) allow foudners to take money off the table – having some money in my bank account doesn’t make me lazy. it makes me greedy, and greed works as a motivator.

2) have standard series A docs for all deals – the amount of money that is wasted on early financings is stupid.

3) let founder/CEOs continue to run the business – asking them during the funding process if they are OK with stepping down is kind of lame. you just met them. besides, why risk disenfranchisement with the other founders/early employees?

4) be OK with smaller returns – having terms that require 4 and 5x deal pricing to force a change of control is lame.

5) make your money on the alpha – why you are basically locking up 20% of committed capital for management fees (2% a year over the life of the fund) is lame. Reduce the management fees and increase carried interest.

6) make founders pay for your services – take a smaller percent of the deal, but work on a retainer for your companies. this could supplement the reduced management fees, and makes sure that the founders know that it’s encumbent on them to get max value out of the investors. i am sure there are all sorts of issues with this, but on the surface it feels better than giving up more of my company.

That’s just a short list. The single biggest problem I have with VCs is their ability to leverage themselves over multiple deals, but their insistence on the opposite for founders – a founder can only work one deal at a time, and must be working 24 hours a day.

]]> By: JK http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-393 JK Wed, 08 Jul 2009 22:04:39 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-393 Great post. The truth about VC is that most people in VC have no business in the business. Outside of introductions to potential customers, VCs add no value. You are paying dearly for someone's network but you have no idea whether it's real or not before you sign terms... so VCs rip off entreprenuers and LPs. Sounds gerat Great post. The truth about VC is that most people in VC have no business in the business. Outside of introductions to potential customers, VCs add no value. You are paying dearly for someone’s network but you have no idea whether it’s real or not before you sign terms…

so VCs rip off entreprenuers and LPs. Sounds gerat

]]> By: Chris Yeh http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-392 Chris Yeh Wed, 08 Jul 2009 21:53:31 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-392 Hey Brandon, When it comes to the VC model, I think that Churchill's old dictum about democracy applies. The system is broken, but so far, no one has come up with a better one. Entrepreneurs need risk capital, and as problematic as VC investments can be, the alternatives are even worse. Banks? The government? Angels? Please. I'd be curious about potential alternatives to the VC industry. Personally, I see some promise in single GP structures like Jeff Clavier, but that remains to be proven. Hey Brandon,

When it comes to the VC model, I think that Churchill’s old dictum about democracy applies. The system is broken, but so far, no one has come up with a better one.

Entrepreneurs need risk capital, and as problematic as VC investments can be, the alternatives are even worse.

Banks? The government? Angels? Please.

I’d be curious about potential alternatives to the VC industry. Personally, I see some promise in single GP structures like Jeff Clavier, but that remains to be proven.

]]> By: Many Niches » Blog Archive » Broken VCs Aftermath http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-388 Many Niches » Blog Archive » Broken VCs Aftermath Wed, 08 Jul 2009 20:27:58 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-388 [...] the title of my first post included the associates, the bulk of the content was around what was wrong with the incentive structure and funding [...] [...] the title of my first post included the associates, the bulk of the content was around what was wrong with the incentive structure and funding [...]

]]> By: Kobi Wrongun http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-387 Kobi Wrongun Wed, 08 Jul 2009 19:00:27 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-387 Although you claim to go on a long rant, I see valid arguments which explain flaws in the venture business. Thanks for the article. However, I do not understand your motivation to first thwart MBA associates. Shouldn't your first attack target the most gigantic problem - incentive scheme? This misplaced priority causes distraction and comic relief. Now you have a bunch of readers eager to agree with everything you say no matter what comes after. I wish the structure invited people to see the logic in the rest of your article and appreciated it for its substance. Although you claim to go on a long rant, I see valid arguments which explain flaws in the venture business. Thanks for the article. However, I do not understand your motivation to first thwart MBA associates. Shouldn’t your first attack target the most gigantic problem – incentive scheme? This misplaced priority causes distraction and comic relief. Now you have a bunch of readers eager to agree with everything you say no matter what comes after. I wish the structure invited people to see the logic in the rest of your article and appreciated it for its substance.

]]> By: Brandon Watson http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-386 Brandon Watson Wed, 08 Jul 2009 18:04:27 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-386 Adam, you are right that most of the introductions happen at the partner level, but let's be clear, the analysts/associates do the front work. They are doing the research, looking at other companies in the space, etc. Often times, they take the first meeting. A VC partner friend of mine said that I was being unfair in painting such a broad generalization for the industry, but I don't think I am that far off. I am pretty surprised at the level of interest this one post has spawned, but I guess that means I struck a nerve. Adam, you are right that most of the introductions happen at the partner level, but let’s be clear, the analysts/associates do the front work. They are doing the research, looking at other companies in the space, etc. Often times, they take the first meeting. A VC partner friend of mine said that I was being unfair in painting such a broad generalization for the industry, but I don’t think I am that far off. I am pretty surprised at the level of interest this one post has spawned, but I guess that means I struck a nerve.

]]> By: Adam http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-385 Adam Wed, 08 Jul 2009 17:54:26 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-385 Although many associates may make more mistakes, what % of early stage deals are actually completed that started with an associate level introduction? In my experience only 10-20% of the deals completed were ever touched by an associated before the partner saw it. Although many associates may make more mistakes, what % of early stage deals are actually completed that started with an associate level introduction? In my experience only 10-20% of the deals completed were ever touched by an associated before the partner saw it.

]]> By: Brijesh http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/comment-page-1/#comment-384 Brijesh Wed, 08 Jul 2009 08:33:46 +0000 http://www.manyniches.com/entrepreneurs/the-vc-model-the-funded-and-the-problem-with-associates/#comment-384 Excellent post Excellent post

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