The Sunday New York Times featured an article about how entrepreneurs are resisting turning to venture capitalist for money. As you can imagine the article has generated a lot of buzz and the usual “piling on” that follows a media attack on a group, especially a wealthy group. The article describes how venture capital is bad for some startups and attempts to provide some reasons for this.
Articles like this often try to simplify a very complex subject and, though entertaining, fail to identify the real root causes for a complex, evolving and often misunderstood asset class. Whenever capital floods into a hot sector of the investment world it changes the incentive structure, the players and the rules of the game. Not too long ago the argument centered around whether or not venture capital was an asset class or a cottage industry. Prior to the Internet Bubble of the 90’s venture capital comprised a few hundred firms most with less than $100 million under management. The bubble saw that number grow to more than 1100 firms. Even post the bubble the number of players making direct investments in startups has grown considerably as has capital under management and annual invested capital in startups. As one would expect the evolving landscape and abundance of capital has changed the motivations and expectations on both sides of the equation. It is unwise to draw too many conclusions from the NYT article and unfair to lump all VCs into the same category. There are good investors and not so good investors. Magazines like Barron’s rank wealth advisors, ETFs and Mutual Funds all the time, but transparency into venture capital is most difficult to come by because the investments are private. Founder’s can choose not to take venture money. They can also do their homework and do their best to identify venture partners that share their vision for how to build enduring profitability and value. Last, they can build their boards by recruiting truly independent directors.
The competition for good projects is fierce and it has been a “founder’s market” for quite some time. As with all investment classes there will be a reversion to the mean. When it happens is anyone’s guess, but it will be painful for founders and venture capitalists alike and it will once again change the rules for how startups get funded. What will remain constant and consistent are the rules for building value and profitability.