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What Have VCs Really Done for Innovation?

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Re: What Have VCs Really Done for Innovation?

#31

Post by tomjen2 »

sachinag wrote: post #21
tomjen2 wrote: post #18

Earlier quoted context omitted.

The banks properly can't legally loan money to something so dangerous as a new business. FDIC could never afford to cover _that_.

The FDIC insures deposits of depositors, not loans made by banks. Loans are where banks (traditionally) make their loans, and the banks themselves bear the risk (traditionally) of those loans. (I hate having to add the "traditionally" thanks to the insane securitization practices of the last decade. shakes fist )

That is true, but there where (are?) quite some limitations on what kind of investments the banks could/can make if they want FDIC to insure the deposits.

Re: What Have VCs Really Done for Innovation?

#32

Post by Eliezer »

sachinag wrote: post #21
tomjen2 wrote: post #18

Earlier quoted context omitted.

The banks properly can't legally loan money to something so dangerous as a new business. FDIC could never afford to cover _that_.

The FDIC insures deposits of depositors, not loans made by banks. Loans are where banks (traditionally) make their loans, and the banks themselves bear the risk (traditionally) of those loans. (I hate having to add the "traditionally" thanks to the insane securitization practices of the last decade. shakes fist )

Sounds like what we need is venture capital securitization!

(I accept no responsibility if this HN comment causes the downfall of America in 20 years.)

Re: What Have VCs Really Done for Innovation?

#33

Post by sachinag »

gruseom wrote: post #5

Some of this critique is surely valid. But people are way too binary about this (vcs-suck vs. no-they-don't). You can see that in the first paragraph, where he argues that VC money wasn't essential to either Microsoft's or Google's success. I don't believe that's true in Google's case. I'm pretty sure that without VC money they wouldn't have been able to hire or scale in the way they did, and without those things the…

Oh, totally: the VCs were smart enough to see that Google was different enough that both KPCB and Sequoia went in 50/50 on the first $25MM round. And Google had a totally failed monetization strategy (their intranet search appliances, of which they sold a single one, to RedHat) before Sergey and Larry capitulated to allow advertising on SERPs. Google needed the VC money to survive until AdWords finally delivered a coherent monetization strategy.

It's a little sad that someone with so much good analysis of the NVCA's overreaching had to throw in a jab so easily refutable.

Re: What Have VCs Really Done for Innovation?

#34

Post by gruseom »

sachinag wrote: post #33
gruseom wrote: post #5

Some of this critique is surely valid. But people are way too binary about this (vcs-suck vs. no-they-don't). You can see that in the first paragraph, where he argues that VC money wasn't essential to either Microsoft's or Google's success. I don't believe that's true in Google's case. I'm pretty sure that without VC money they wouldn't have been able to hire or scale in the way they did, and without those things the…

Oh, totally: the VCs were smart enough to see that Google was different enough that both KPCB and Sequoia went in 50/50 on the first $25MM round. And Google had a totally failed monetization strategy (their intranet search appliances, of which they sold a single one, to RedHat) before Sergey and Larry capitulated to allow advertising on SERPs. Google needed the VC money to survive until AdWords finally delivered a co…

I agree, it's superfluous and undermines his case.

This is interesting:

their intranet search appliances, of which they sold a single one, to RedHat

I knew their appliance business wasn't that big, but is that really true? How do you know it?

Re: What Have VCs Really Done for Innovation?

#35

Post by akeefer »

prakash wrote: post #24
pg wrote: post #22

Earlier quoted context omitted.

It's unequivocal. You could also use a revenue threshold.

How about some combination of Revenue + Profitability? Revenue alone doesn't help, I think Facebook crossed $300 MM but was not profitable at that point in time. Current IPO's target revenue in the range of $50 MM (I think), pre-bubble IPO's required 4 straight quarters of revenue growth (something like that), this is a moving dynamic.

For what it's worth, my understanding is that the target these days (especially thanks to the costs of Sarbanes-Oxley compliance) is closer to $100 MM in revenue to even think about an IPO.

Re: What Have VCs Really Done for Innovation?

#36

Post by tedunangst »

gruseom wrote: post #34
sachinag wrote: post #33

Earlier quoted context omitted.

Oh, totally: the VCs were smart enough to see that Google was different enough that both KPCB and Sequoia went in 50/50 on the first $25MM round. And Google had a totally failed monetization strategy (their intranet search appliances, of which they sold a single one, to RedHat) before Sergey and Larry capitulated to allow advertising on SERPs. Google needed the VC money to survive until AdWords finally delivered a co…

I agree, it's superfluous and undermines his case. This is interesting: their intranet search appliances, of which they sold a single one, to RedHat I knew their appliance business wasn't that big, but is that really true? How do you know it?

It's false. I worked for a company that owned one and was not named RedHat.

Re: What Have VCs Really Done for Innovation?

#37

Post by danielrhodes »

fnid wrote: post #4

The venture capital market is crumbling. It used to cost a lot of money to build a company, but not anymore and VCs are no longer the gatekeepers to success. Their exits are puny and most of them fail. They are hunting needles in haystacks. The supply is greater than demand. Their 2+20 scheme is too expensive. The wealthy don't need the VCs anymore and the returns they are bringing in aren't worth the risk. This crap…

You are talking about two different things here, which I think it goes to everybody's benefit to learn about.

There are lifestyle businesses and there are VC-backed businesses.

Lifestyle businesses usually operate in safer, more pre-established markets. You can access already existing customer bases and in general the VC and the entrepreneur don't need each other because the entrepreneur can get to some level of revenue that enables him or her to cover operating costs. The VC isn't interested however because the market is already established and the returns and likelihood of you taking over the entire market are quite small. They are called lifestyle businesses because there is less pressure, so you can maintain a life outside of the startup (at least after you have stabilized revenue). Some people enjoy these startups: they are relatively less risk and they allow you to get decent returns. It's akin to starting up a cornershop. Just don't pretend you are starting an empire. fnid: it sounds like you are in such a market.

VC-backed businesses are there because there is a new and potentially huge market to be found and VCs put their cash into these companies so they can move quickly, out-perform competitors, and get a large chunk of that market before it gets too fragmented. Growth explodes because they have found a new market capable of sustaining that growth, not because of some magical entrepreneurial powers.

We should all be happy there are more lifestyle businesses developing on the internet: it means these markets are growing and bringing more people into the fold. But don't trick yourself if you are in such a market that you will be the market leader as you have probably already missed the boat or the market size is too small for you to ever realize massive potential. The smart entrepreneurs and VCs leave quickly to refocus on more promising opportunities once they figure out that something is not as big as they once thought (hint: when people are jumping ship, it is not necessarily because you won).

These two types of businesses are not mutually exclusive.

What's cool and new about the internet is that it is continually getting shook up by new markets. The permutations seem endless.

Re: What Have VCs Really Done for Innovation?

#38

Post by danielrhodes »

sachinag wrote: post #9
known wrote: post #7

I believe Angel Investors (not VCs) contributed a lot for innovation. http://paulgraham.com/angelinvesting.html

Angel investors are now, and always have been, the engines for innovation. Bankers - the old angels - funded Henry Ford. Back in the day, you could get a loan from a bank for a new venture. You can't any more; this, more than anything, is why new innovation is so concentrated in geographic areas. In the old days, New York banks would give money to an engineer in Detroit. Now, if you want angel money, you need to be p…

Very true. At least in the valley, VCs count on angels to bring them deal flow.

Re: What Have VCs Really Done for Innovation?

#39

Post by abalashov »

fnid wrote: post #4

The venture capital market is crumbling. It used to cost a lot of money to build a company, but not anymore and VCs are no longer the gatekeepers to success. Their exits are puny and most of them fail. They are hunting needles in haystacks. The supply is greater than demand. Their 2+20 scheme is too expensive. The wealthy don't need the VCs anymore and the returns they are bringing in aren't worth the risk. This crap…

Here are the tips for VC: Make your operations more scalable, increase diversity, fund in smaller amounts and expect less control and equity in exchange.

I would add to that:

Allow founders to [partially] cash out early.

I think that may be the single most significant thing other than investing smaller amounts. Founders who have to wait 4-6 years gambling ever higher stakes on a "liquidity event" that may never happen (on the VCs' terms, that is) are increasingly finding that it's better to just tell institutional investors "blow me" and wing it themselves, unless the project is just prohibitively capital-intensive.

Nobody who's young and on the margin of broke wants to be strung along by condescending "carrots" of "future incentives" and encouraged to "think about the big picture" instead of focusing on getting some actual payoff from one's efforts.

Re: What Have VCs Really Done for Innovation?

#40

Post by abalashov »

adrianwaj wrote: post #25
pg wrote: post #14

Maybe the NVCA statistics are somewhat bogus, but there is a pretty compelling way to answer the question empirically: how many tech companies have made it as far as an IPO without taking money from VC funds? Maybe the world is changing. Maybe now that it's cheaper to start startups, some will start to make it all the way to IPOs without VC funding. Obviously I would love it if a company we funded could make it to an…

I'm unsure of how you'd execute on it, but have you thought about rolling up many startups into 1? From there you could IPO, cross-own, etc. I think the founders, especially the ones closest to an exit would need a good reason to change their path forward. There'd be no shortage of talent, although acting as an organization mightn't be so attractive. Check out Web Conglomerate if interested to learn more: http://tr.i…

although acting as an organization mightn't be so attractive.

I think that's the key issue undermining the economic coherence of such an endeavour.

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