As best as I can see from Silicon Valley (SV) VCs,
what they really like is not youth, age,
ideas, or advanced technology
but 'traction'.
If SV makes mistakes on age, then maybe they
invest too much in very young entrepreneurs.
One cynical reason is that people so young
can be easier to manipulate. If they have
a great business but are doing a poor job
managing it, then the VCs can bring in
one of their buddies as CEO; apparently in the
past this was more common and, really,
an intended act.
One SV firm wrote me, "We would not consider
investing in anything like your project before
you have 100,000 unique visitors a month."
Okay. Suppose 100,000 different people come to
my site, on average each person comes 5 times,
on average each time they come they see
8 Web pages with 5 ads per page,
and suppose I get paid $2 per 1000 ads displayed.
Then my monthly revenue would be
100,000 * 5 * 8 * 5 * 2 / 1000 = 40,000
dollars. Then why the heck would I take
their term sheet where I would suddenly
go from owning 100% of my company
to owning 0% of it with some chance
of getting back to maybe 60% on a four
year vesting schedule, when during those
four years the VCs could fire me for
any reason or no reason and, really,
just take all of my company the day
after I cash their check.
And, my company is based on some
technical work, and as the company
grows I will need to do more technical
work. Then a Board would need to
approve the budgets for the technical
work but would not understand that work.
So, the Board would be reluctant to
approve the budgets and, more generally,
would want to exercise their
'fiduciary' responsibility to 'control'
the company. They would kill
all prospects of growth for the technology
of the company. VCs don't always do this
and clearly have not done that for Google,
but the VCs write their agreements so that
they have the power to do such things.
The solution of the two entrepreneurs in the
article is to (1) see a suitable problem,
(2) think of a good solution,
(3) write the software to implement their
solution, (4) go live by having the software
run on a Web site or selling it, say, as
an app. They should think of (1) and (2)
so that they can get to, say,
$40,000 a month in revenue
just with their own checkbooks.
For the VCs, from a Fred Wilson post
at AVC.com some months ago, the
average ROI is poor, really, just
awful. So, Darwin will be along
shortly, and the ranks of the VCs
will thin out.
Net, the VCs will have to make money
or do something else. If they make
money, then their LPs will continue
to invest and it will be a little foolish
to say that the VCs are making mistakes.
Recently Fred Wilson had a lecture on
10 ways for an entrepreneur to be their
own boss and emphasized that getting
venture capital is not nearly the only
way.
My background in doing projects was from
US DoD work and also academic research.
From those two, I have had to conclude
that VCs do projects in very different
ways. While I do believe that VCs are
making some big mistakes, some of the
VCs are making money. Maybe
Benchmark, Sequoia, USV, and a few
more are making money.