The Problem with the "New" Venture Capital Model The classic venture capital funds of the 60s and 70s have been largely replaced by financial engineering firms that emphasize deal flow, transaction structuring and closing, and exit strategies. They oversee the investments at a board level, but do not generally get involved with executing the business plan.
Today, venture capital is just another asset class for the large financial institutions, having grown more than 30 fold since 1990. As a result, venture capital firms feel the pressure to invest more than $25 billion every year as quickly as possible. This requirement drives the need for a VC skill set of MBAs more than entrepreneurs. This new elevated investing environment is great for the gross return of dollars to the financial institutions and for the amount of available capital to fund private companies. Unfortunately, this often does not serve the entrepreneur very well. Carnage on Main Street
For every well publicized VC success, there are thousands of promising companies who have been overlooked or have taken too much capital and subsequently blown up by VCs. The investment model today dictates fast success and fast failure. The emphasis is not on the care and feeding of the entrepreneurial idea so much as finding the rare success that requires a large amount of capital. New venture capital funding benchmarks are not driven by changing business needs as much as the financial return requirements for the large funds. To get a good return on a $1 billion fund, the fund manager needs to generate a return in the hundreds of millions of dollars. These opportunities are few and far between.Instead, promising businesses that would otherwise be successful given enough time instead get killed prematurely. Excessive Risk to Entrepreneurs
While a VC fund needs spectacular returns on the order of hundreds of millions of dollars, this is not the case for the entrepreneur.A much larger number of businesses can return tens of millions of dollars with a proportionally smaller investment. But if they are funded with too much capital relative to their potential, they will not produce the desired results and will be liquidated. The entrepreneur gets his or her ownership diluted and becomes the quintessential entrepreneur who “lost their company”. There is an important role for the institutional venture capital firms in certain types of businesses. But there are many other worthy businesses being left behind because they can not generate a $1 billion return on invested capital.
Back to Basics: How Venture Capital Should Operate
Early venture capital funds were started by experienced successful entrepreneurs who wanted to help new entrepreneurs build their businesses. They worked side by side to shape the business strategy, recruit good people and coach the execution of the plan every step of the way. They added tremendous value that was often a critical part of the success story for the new venture. This is how companies like Apple and Amgen and Sun got their start. In the “old” days, a seed round was $1 - $2 million from a $40 million venture capital fund and the total capitalization before an IPO might be $5 - $10 million. Now, a seed round might be $5 - $10 million from a $1 billion fund and a pre-IPO capitalization might be $100 million or more. Classic Venture Capital Point Cypress Ventures goes back to basics: working side by side with the entrepreneur every step of the way to help the new idea take its natural course toward success at a pace and funding level dictated by the opportunity.