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January 29, 2006

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I wrote some of my response to this in my post yesterday, but I believe the key values that I and most of my entrepreneur friends (who, admittedly, aren't the Robert Scoble's and Mark Evans' of the world, but we still have a lot of fun in spite of that) are looking for from VC's are:

1. Support: In spite of our egos, we're all very aware of what we do and don't know. And most of us have somehow learned that "play to your strengths" is a great mantra. We just don't know who to turn to for our areas of weakness.
2. Knowledge: One of the areas that isn't a "strength" for this new generation of entrepreneur is knowledge. Sure, we have lots of head knowledge, but the experiential, stand-alongside mentor type knowledge is missing, and most of us want this from investors / VC's.
3. Training: I touched on this in the post, but training new entrepreneurs is, to me, absolutely essential. In addition, running training as "camps" would allow entrepreneurs to develop relationships with each other early on, which is sure to help the VC / early stage investment firm in the long term.
4. Connections: Yes, blogging is a rolodex. But, getting beyond that rolodex is still very hard. Getting ad deals with newscorps, content partnerships with MSN and Yahoo, etc, is still a lot of hard work. Hard work that the relationships VC's have can mitigate.
5. Money: Not much, and not too much all at once, but in the right hands, it's amazing what 50-100K can do these days. In truth, many of my entrepreneur friends are asking for 3-5M$ these days because they have to. Sure, the investment looks good to VC's and many of my friends are getting that funding. But they know that they could have done just as much with 1/10 of what they received. Strategic funding.

This is a great discussion. I'm doing a lot of travelling in the next few months (Rochester, Toronto, Vancouver, San Fran) and I'm hoping to continue having this discussion with entrepreneurs, business managers and whoever else I bump into.

At the end of the day, though, I believe you either need to choose between changing everything and changing just a few things. Changing just a few things, in my mind, is far more likely to succeed. I know Dave wants to change everything, though, and I've never been one to stand in Dave's way ;-)

> I believe if you come into my office for a 30 minute no harm, no foul meeting and, as part of that 30 minute meeting some combination of the people above giving you some feedback is a priceless piece of capital.

(1) Why don't you sell that meeting?

(2) Will you invest in a company that has given some stock in exchange for such a meeting with some other collection of worthies?

This is all very well, but venture capital is primarily about the money kind of capital. By going into all this intellectual and human capital stuff you are drawing yourself away from the core of your business, which is putting money to work on behalf of investors.

The venture capital industry risks making the same mistake the major airlines made when they padded out their service into some sort of pseudo-luxury product. In the end the whole thing turned out to be a load of rubbish. For most people, flying isn't a luxury experience. It isn't fun. It's just a way of getting from A to B.

Now, that's not to say that it's completely a bad idea. It might work for you, and you might be able to deliver value for your investors doing it, the same way that Singapore Airlines delivers value to its shareholders through the service formula.

But like it ot not, entrepreneurs go to VCs to get money, not entrepreneurial advice. They don't really buy all the other stuff.

Remember, you aren't hearing the truth on this. Everyone tells venture capitalists that they're looking for more than money when they talk to VCs, that they're looking for knowledge, expertise and all the rest of it. But it's just a fiction to make everyone feel good about themselves. Remember the last time an airline did something bad to you? I'll bet you went to the desk and said something like 'I expected better service from XXX airlines.' But you didn't say it because you really believed it. You know well that all the airlines do more or less the same crappy things to their passengers. But you just rolled out the fiction of quality and differentiation to make the person on the other side of the desk feel good about him- or herself. Entrepreneurs do just the same thing with investors.

The average venture capital fund has to be about money and applying money on behalf of investors in the most effective way possible. Do enough deals. Get rid of the fancy offices. Reduce the cost and time to invest. Get rid of all that 30,000-dollar lawyer junk. Get rid of the 6 percent-plus investment banker fees that hurt your investors at the flotation/sell-off stage. That's what running a great venture capital firm should be all about.

If you want to be in intellectual capital become an engineer or an artist. If you want to be in human capital, get into HR. If you want to get money and make money work, then venture capital is a business to be in.

It's a way of getting from 'A' to 'B'.

There seem to be two views of what VCs provide - money and service.

Can they be unbundled? Should they?

Well, you and Winer certainly have global jaws a-wagging, now doncha?

:-)

-- Stuart

Great post Rick.

Sure, we're doing a start up over at http://hotbusinessblog.com/

It's great of you to wonder what it is that people like me actually need.

I need risk management.

Of course, I don't mind doing a song and dance how business blogs are the greatest thing since sliced bread, but there are just soooooo many variables that impact on the outcome of this venture.

What I want a venture guys to tell me, "Yo! Danny, you've got risks. Undercapitalisation is one of them. There is a few more. Here's a 2 year program we're putting you on to manage these uncertainties. We'll get through it together."

I have never, ever heard a vc say something like that.

Built a great web service bootstrap style that replaces ACT or Goldmine.... Now what?

Michael
http://pushcrm.com

The thing is, though...your idea sounds great. I'd love to have someone offering my business a service like that. I'd pay cash for it...if I had any cash. But I don't. And I really can't say I want it badly enough to pay equity for it.

Perhaps if there were some _unique_ insights that your all-star crew of experts could offer, then those might be worth some sacrifice to get. But the value-add (not just over what I already know myself, but over what I know plus what I could learn by reading everything they've ever written and posted in public places or offered for sale in bookstores) would have to be pretty significant and extremely obvious.

The only reason I can ever see myself seeking VC funding is if the business needs to grow fast enough that _competent_ sales and marketing types are required, because the wing-it-myself strategy no longer works. If you can find a way to short-circuit _that_ requirement...well, that'd be a value-add I could easily believe in. Trading equity for getting that particular headache off my desk would be an exchange I wouldn't lose a moment's sleep doubting.

I definately agree with you that often the real value of the venture investor (whether an angel or VC) is the advice and contacts.

If you'd like some perspective on the angel investment side of things, you might want to take a look at my post "On Being an Angel" http://www.lifewithalacrity.com/2006/01/on_being_an_ang.html

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