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Venture Company

• A new, modern financial system to fix Venture is coming 6 March, 2010, 8:46 am
  By Georges van HoegaerdenI have disclosed in "How to fix VC once and for all" one important aspect of how to fundamentally change the financial system in Venture, and that is to change it into a real marketplace. A free-market in which marketplace transparency to all participants will establish the true merit of all participants; Limited Partners (LPs), Venture Capitalists (VCs) and Entrepreneurs alike. Without that marketplace transparency, Venture Capital will continue to slide down the sub-prime investment slope it has been on the last 10, if not 20 years, leaving a growing opportunity of disruptive innovation under-financed and starving. Unchanged, the deployment of LP dollars will continue to fragment and yield even lower public value and trust than it has produced over the last 10 years. Top-level Venture reformThe systemic failure of the financial system in Venture is why its output does not generate enough value (M&A, IPO etc). Venture Capital needs to become more agile, risk-taking, transparent and accountable (turn prime) in order to consistently attract entrepreneurs with a value that can change the world. Its financial system is what turned Venture Capital sub-prime, not the lack of entrepreneurs, developers, visas, too many regulations, sarbox, FAS157 etc.. Once we change Venture into an efficient free-market marketplace I can assure you many of the current restrictions, born out of an artificially regulated market, will simply dissipate or become irrelevant. Today, Venture performance is severely hindered by its black-box, under-the-table, institutionalized, monolithic operations. Lack of marketplace transparency (amongst many other deficiencies):allows walking dead VC firms to crush the dreams of (unknowing) entrepreneursprevents competition between VCs, leading to a demi-cartel and a commoditized investment thesisallows GPs to hide behind the (often outdated) brand of their aging VC institutionsclouds the difference between money and meritTake me seriousBuilding a new financial system for the sake of re-empowering innovation through Venture is "my new startup", and as is typical to innovation, many first ignored me, then they ridiculed me, then they fought me, and then I win (Ghandi quote). I win because Venture reform is the right thing to do for our country (not because I have an axe to grind). I win because the sector has lost serious money. I win because the opportunities in Venture have never been better. I win because the systemic failure of VC proves they are wrong. I win because there are no more bubbles for VCs to ride. I win because VCs are running out of excuses and time. I win because VCs (by virtue of their selections) have abused the trust of public markets. I win because entrepreneurs are unhappy with whom they partner and how they are being treated. I win because both asset holders in Venture are unhappy with the derivative. I win because I have identified the systemic failure in Venture and have a solution to fix it all in one fell swoop. We all win because that solution gets us all to a better place, including VCs with merit. LPs own the problemLPs are becoming aware of VC dysfunction and have started calling their Fund-of-funds and VCs based on my individual conversations with them and my blog, some VCs have confessed to me. LPs are at the top of the food-chain and can no longer deploy money without verifying the merit of the underlying financial system, top-to-bottom. The behavior of the dog is the responsibility of its owner, and so is the performance of VC the discipline of the LP.LPs now start to realize that great performance in Venture comes from establishing discipline. Not just to who, but how they deploy money matters, and what the impact is on the rest of their value chain and the sector. How it affects VCs and how its finds the outliers of innovation that can produce substantial value. Only that discipline can fundamentally and consistently lead to great performance.Smart LPs in Venture understand how to rely on a real marketplace in which merit and real competition (not the artificial one Tim Draper defines as "I have respect for all my competitors. We co-invest together.") thrives to find the outliers of innovation.Inappropriate measuresIt still baffles me how some LPs continue to recommit to Venture without a change to the underlying financial system and marketplace characteristics. But perhaps I shouldn't be surprised: a sector that has previously managed to sell the delusion of cyclical performance, measured against irrelevant market indices, and attracted the improper influence of the macro-economy, is very capable of producing new promises to maintain its position. LPs should just not expect those promises to come true, not again. That would be the definition of insanity. What is not a solution to Venture is cutting management fees. Changes in fees and carry structures are not going to change a sub-prime VC to prime. You cannot train or coax sub-prime VCs to become prime, in the same way you cannot train or coax people to become entrepreneurs. You are or you are not (by virtue of your DNA and life experiences). And just like VCs need to focus on the creation of upside, not the protection of downside - so do LPs need to focus on the upside with VC, established by merit, rather than protecting downside. Lift the veil off my planBut marketplace transparency is just one aspect of my plan. The Venture reform described in the (for customers only version of the) acclaimed presentation "2010: The State of Venture Capital" resolves all of the aforementioned issues in Venture, including:reduces ten levels of diversification by more than halfeliminates bottom-heavy diversificationemploys far less fragmentation of riskestablishes a meritocracy of GPscreates natural competition between GPsde-commoditizes the investment thesisallows for the discovery of the outliers of innovationprovides better support for entrepreneursdeploys real venture capitalbuilds more stable companiesbuilds more disruptive valueFirst movers advantagePrior to Apple entering the music arena, many VCs invested in music without producing any lasting public value. Now in Venture I am about to deploy a winner-takes-all Venture platform that leaves the LP laggers with artificial Venture marketplaces behind. Venture, the way it works today can never function nor scale, because the market model is simply incompatible with the discovery of the outliers innovation. I invite the LPs who see the wide-open greenfield opportunity in Venture, to hop on board and use a brand new mower that is indeed capable of harvesting the hay that is ready for the taking. Innovation is by no means dead, and neither is the fantastic new opportunity to monetize it.
• Why VC is such a bad date 25 February, 2010, 6:48 am
  By Georges van HoegaerdenToday's Venture Capitalists (VCs) have often qualified innovation as a buyer's or a seller's market (in publicly discussing valuation trends) and that communicates so well how they view innovation; as a commodity. No wonder they fail miserably in generating meaningful alpha (portfolio returns for Limited Partners, or LPs). It is impossible to find and attract outliers of innovation by comparing and compressing valuations. And commodities never outgrow their peers.Disruptive innovation is never a commodity and is always a seller's market (with the company selling its stock to investors). So, the minute innovation becomes a buyer's market, that innovation has just been "crowned" a sub-prime entity and so have both buyer and seller. Finding the perfect dateAs a VC, finding the right type of innovation to monetize is like finding the perfect date, they are few and far between. And to a founder of a startup finding the right General Partner (at a VC firm) is similarly daunting. A unique match between two people (the General Partner and the CEO) is something that takes more than glowing at the prospect of having a baby together (i.e. build a new prosperous company) and discussing the financial projections and terms of the deal. Most of us can dream, but can we make it happen together is the real question.Higher standardsThe reason why many people are such bad daters is because they do not hold on to their own standards, those that make them happy and those that make them strong. They confuse money, power and perks with merit and hope sheer proximity will someday rub some off to them. But it never does, you need to do the hard work yourself to reap its precious reward. You get what you put in.I do not consider myself a pretty boy, yet never had a problem dating because I know what I want and especially stand firm on what I do not. Standing firm allows you to stay true to yourself and often has the additional benefit of weeding out sub-prime parties quickly and thus avoid unmanageable disaster further down the road. (That is my happy date-turned-wife in the picture.)Stay authenticI cannot tell you how many times I have spoken to entrepreneurs that have banged their heads against the doors of VCs, and selectively served as their dutiful psychologist to help them not to bow down to sub-prime standards. Most entrepreneurs become nervous and afraid to negotiate, because this VC may just be the only interested party they have, and if you are a tough negotiator those investors may frighten others that you are "hard to work with". But a choice of one investor is not a choice. Even before any commitment to invest is reached, entrepreneurs frequently let VC change their business model, use-of-proceeds, valuation and everything else, in the hopes of landing a round of funding. Not realizing that this VC can have whatever opinions it wants, but as an entrepreneur you are the only one responsible for making it happen. Do not accept an infinite monkey theorem, that you then need to turn into a work of Shakespeare in your startup. So, don't be afraid to lose. Because losing from a sub-prime VC really is a win.Marriage does not make a personGetting laid is not a recipe to produce a happy child, a healthy marriage is. So, even if an entrepreneur lands an investment, raising Venture Capital alone does not make a successful company. With so many sub-prime VCs, statistically and empirically the odds are still not in your favor.Success, in the latter case, is defined by the company's ability to produce public value, either by serving the public directly or indirectly by getting them to invest by way of IPO (or acquisition). So, both parties need to demonstrate that they are experienced, skilled, agree and contribute to achieving that (early) public value for the company. In other words, a marriage needs to be consummated in which the assets, principles and goals of raising a happy child (the company) is shared. And that means that while both parties supply different assets, one cannot overpower the other (like Pimps and Hoes) and force its agenda. A priori, an equilibrium needs to be established that is healthy and promises minimal friction down the road.Bad starts make for bad endingsWithout an organic fit and chemistry, a venture deal that starts off wrong usually ends wrong. For the VC that damage is diversified, for the entrepreneur it is often crushing. So, the dating process is not just a way for the VC to check the entrepreneur out, but for the entrepreneur to gauge if the proposed equilibrium (mentality, experience, skills, term-sheet, vision) is authentic, attainable and healthy.Here is how many VCs set themselves up wrong for the dating game and why entrepreneurs deserve better (in this context "the date" is the VC, and "you" is the entrepreneur):The date wants to know everything about you but won't tell much about himself.VCs demand to know a lot about the entrepreneur, but what does an entrepreneur really know about the VC's merit? GP merit hides behind ten levels of diversification and a fuzzy Private Placement Memorandum (PPM, the business plan for LPs) that leaves plenty of room for "creative" post close re-interpretation. Whether the GP is a great gambler or skillful is impossible to assert. What we do know is that many GPs have never themselves crossed the chasm, a trait that makes them almost certain a bad dating partner.The date wants to date other people at the same time.VCs diversify their risk by investing in other (hopefully not competitive) companies at the same time and hedge their bets, they do not often hedge their often ill-informed opinions upon the entrepreneur. Expect many to do a John Edwards on you when your future suddenly looks like cancer.The date does not want you to date someone else too.VCs diversify their risk, but watch their reaction when you do the same. They'll get mad, because you have just told them that VC money is a commodity (and disruptive innovation is not) and now they need to step it up and prove their value-add. Right where you want them.The date wants to have a threesome, and takes his pick.VCs are more worried about downside risk than upside risk and try to find an accomplice, and syndicate early to avoid risk. They often finagle a sweet syndication deal with a partner under the table that is unlikely to be in your advantage. VC is a demi-cartel.The date thinks that his money compensates for lack of empathy.Many VCs lack entrepreneurial experience, which according to a Dutch saying means "they've heard the church bell ring, but they don't know where the sound came from". Money does not make up for in-experience and lack of skills, especially not in the boardroom of an early stage company.The date wants you to tell him exactly what you are bringing to the table, without him doing the same.Entrepreneurs are asked to make elaborate predictions about growth trajectories, and stick to them. But have you asked the VC to provide full runway support in return?The date discusses divorce before you even start dating.You want to change the world, the VC wants to target exits. Foolishly the sub-prime VC does not realize that changing the world creates a much more reliable exit than an early "delivery" could ever promise. The date wants to know whether you want children, but withholds his wishes.Real entrepreneurs want to change the world, not just to exit. VCs however will change their mind depending on how the rest of their portfolio is doing and whether at that time they can get themselves in the top-quartile. I know many companies that have been pushed to early "delivery", to the chagrin of their founders. The date never really commits and keep all options open.Entrepreneurs are forced to submit to funding rounds that are designed purely to minimize downside risk for VCs. While you commit to the marriage all the way, a VC can decide to bail out at any time, leaving you hanging (with a strategy that may not be yours, a cap-table that is destroyed and a runway that may no longer be viable).The date needs the approval of all his cousins before he can get married.Seldom can the opinion of one GP secure the deal. He has to push an outlier proposition through an elaborate socialist process with other GPs in the firm to close. Simply an incompatible process that should be banned. The date requires a prenuptial to engage.VCs structure elaborate ownership agreements, by way of voting rights, valuations, bylaws - you name it. Forgetting that rudimentary control plus the ability for the company to develop itself gives it the highest probability of succeeding. If as a VC you don't believe that, you should not engage in the deal to begin with. Elaborate downside protection means you simply do not believe in the upside. The date wants full control over your purse.Excessive controls on money means there is no trust between VC and entrepreneur. It is necessary to verify trust, but not giving it in advance means the entrepreneur is not giving the VC his trust either. A CEO needs to be able to run the company and not be bogged down by distracting and bureaucratic spending rules as long as he stays within the use-of-proceeds.The VC institution needs to be fixed firstNow, I can make a similar list about people that chase sub-prime investments. More than 10 years of sub-prime investments has attracted a lot of people to that sub-prime thesis, the majority without the attributes needed to become a successful entrepreneur. With a still growing number of sub-prime VCs at play, certain corporations have become better custodians of disruptive innovation, able to stimulate entrepreneurs more effectively.The only way, in my view, we can fix Venture is to change the model by which we deploy the matchmaking services between the assets of the LPs (money) and the assets of the entrepreneurs (ideas). With a more discretionary VC intermediary we will automatically attract more disruptive ideas (by stimulating entrepreneurs to look at Venture as a prime venue for innovation again) and create more meaningful value.By the way, I do not dislike many VCs personally, I just despise the institution they represent - because it performs so poorly. That hurts LPs and their dissatisfaction will have a devastating effect to the innovation in this country. I am working feverishly on getting VC fixed by changing the economic model that allows LPs to be taken for a ride. Disruptive innovation can wait until they start implementing my economic system. And in the meantime, dear entrepreneur, if you think you have what it takes now, keep your foot down and your head up and keep looking for that discretionary VC in the haystack. Happy dating! Je maintiendrai!
• There never was a Tech bubble 23 February, 2010, 10:13 am
  By Georges van HoegaerdenPart of the discovery of coming up with a permanent fix to Venture came not from an endless debate about what happened to Venture (although I am more than willing to do so on occasion) but to envision what should happen to Venture if one were to erect the sector now (something emerging economies are actively pondering). That is perhaps the reason why the only one who could come up with a permanent fix to Venture is an entrepreneur. Because as an entrepreneur you are born with the gift not to analyze existing market deficiencies (with loads of statistics) until you are blue in the face, but to reconstruct and imagine a new and much bigger opportunity from your (perhaps idealistic) view of how the world should work. And then to develop such a robust new system so the bad things from the past find automatic resistance (not manual labor or government regulation). And boy, do I believe in a big opportunity in Technology Venture. I even believe it scales. Is this working for you?I use the previous phrase from Oprah a lot as it communicates so well that regardless of anyone's rational for the prospects of innovation, the current system under which we deploy it simply does not work. And I pity the LPs who with blinders on, continue down this road expecting a different result. Good luck!To reiterate again, over the last 10 years (some technology celebrities say longer) we, as participants in the sector have generated less than 10% IRR to Limited Partners (LPs, who disseminate their money through VC), wasted about $1.9 Trillion in funds that never produced any public value and have left LPs and entrepreneurs severely disillusioned about the value, viability and path of innovation. All the while, many Venture Capitalists, as the derivatives (without assets) in this marketplace pride themselves being in the top quartile (a meaningless definition in its own right), or the survivor of "the fittest" of an underperforming sector with little value. They continue to stuff their pockets with a fat-and-happy management fee that allows them to retire for life (sometimes after just one 10-year try and vintage), publicly comforting themselves that the world has changed so much that it is now time for new investors to step in. Thanks a lot, after having taken Venture for a very comfortable ride without producing real returns, and worse, soiling the pool for the rest of us.The real asset holders in Venture, LPs with money and entrepreneurs with ideas have been fooled (many times over). But by who really?Who's bubble is it?As you can tell from the last paragraph I am often irritated by the lack of integrity of many human beings, especially of those who do anything to make a buck. Because VCs with integrity could solve their own issues in Venture without the need for a complete Venture overhaul. But that would require their ability to be self critical (they have done nothing but blame external factors) and people who are confident enough to cannibalize their own position for the greater good. Too idealistic perhaps. And so a new system in Venture needs to include not just measures to provide better upside but a concerted and immediate eradication of those intermediaries that do not perform. But we need to fix the disease not merely fix the symptoms and the following quote from Einstein comes to mind:"Mistrust of every kind of authority grew out of this experience, a skeptical attitude toward the convictions that were alive in any specific social environment — an attitude that has never again left me, even though, later on, it has been tempered by a better insight into the causal connections." - Albert EinsteinWhich I parlay in Venture to:"I mistrust many venture capitalists for good reason (their lack of merit), but have learned that the casual connection is the dysfunctional financial system that allows them to take it for a ride." - Georges van HoegaerdenJust like the behavior of a dog is the responsibility of its owner, so is the performance of the VC the responsibility of the Limited Partner. And VC does not perform (and unchanged will not) because it selects companies that are sub-prime innovations that do not have a strong potential to yield public value. And that is because many VCs themselves are sub-prime and therefor unable to spot disruptive innovation to begin with. On top of that we have an in-transparent financial system that allows for bottom-heavy diversification of more than ten layers deep (see "2010: The State of Venture Capital"), that is far removed from an efficient marketplace in which LPs and entrepreneurs can verify the merit of the ideal VC matchmakers. Blame where blame is dueAnd so the real owner of the bubble is (again) our financial system that allows sub-prime operators (VCs without entrepreneurial merit) to slip in and mess up the initial success of the venture sector that was so beautifully crafted by Bill Draper and the likes. So, the 2001 implosion was not a tech bubble, but a finance bubble and a clear warning of what is to come to other sectors that deploy the same economic model to their respective domains (I have spotted the pattern). We need entrepreneurs to think bigger (not more restricted) and unabashed to find the next innovation that can change the world. But only an economic system that deploys prime matchmakers will be able to cherry-pick those prospects. So, in the end we cannot really blame the current crop of sub-prime VCs for getting picked, and they will continue to sit on their throne (a ten year vintage) until time runs out anyway, but we need to change our economic system so we prevent them from entering in the first place. And changing management fees (that some focus on) alone does not turn a sub-prime VC into prime. With our financial system eleven times the size of production, it is time for the foundation of our economic system to get an overhaul. And Venture would be a great place to start.
• Does Venture Scale? 22 February, 2010, 11:43 am
  By Georges van HoegaerdenLast week, through a long string of conversations with a CalPERS board member and some trusted peers, I ended up speaking with Joe Dear (Chief Investment Officer) and other members of his Venture team at CalPERS in Sacramento, the largest pension fund in the United States with $200 Billion in total Assets Under Management and single largest investor in the Venture sector (as a Limited Partner, or LP), with an allocation of around $20 Billion in direct and indirect (fund-of-funds) alternative investments (which includes venture). Joe expressed specific concern about the ailing Venture sector, a message we as participants in the Venture ecosystem should all take very seriously. I do, because I hear it all the time, and it worries me how devastating a withdrawal of CalPERS (10% or so of all U.S. Venture and the consequent ripple) from Venture would be to Silicon Valley and to our country. Such withdrawal would be devastating to our entrepreneurial capacity and drive to which we owe our statue in the world. We still have many parasites (some quite well known, and not too anxious to be found out) who are too busy deploying ingenious methods to suck this ecosystem dry while it lasts, unable and unwilling to see the dark clouds forming above their heads.Yet, we all need to pay attention to the discomfort of LPs, and resolve those - not with a new set of lies and promises - but with a breakthrough systemic solution to improve the performance of Venture Capital. Late to the table in 1988 as portfolio manager Jesús Argüelles explains, CalPERS made up for it in the 90s followed by disappointing performance today. Joe questioned the sector's viability as a whole, by rhetorically asking me (amongst other topics):Does Venture Scale?Before I answer that question it is important to note how ignorant the many players in Venture are to the impending threat this question poses. At this public event, I recognized only two Venture Capital (VC) firms that where present. If as a VC I really wanted to make money for my LP in these turbulent times, I would show up to offer whatever support I can muster. I did: to represent the unwavering value of disruptive innovation.No-one of note from the National Venture Capital Association (NVCA) was present according to the attendee listing handed out at the event. Rather than to focus on helping CalPERS generate upside, I guess it prefers to spend its time protecting its members' downside to lawmakers. The VC lobbyist needs to rethink its leadership focus.The dismay of LPs in the Venture sector is in sharp contrast to the incessant, blind, self-serving and false optimism of many Venture participants, journalists and investors who continue to suck entrepreneurs dry and leave a subprime Venture pool behind that clouds the opportunity for serious investors and serious entrepreneurs.No-one (except we) in the Venture community is truly acknowledging, with a plan of change, how the performance in Venture can systemically be improved. Better times, with more of the same is what many wait for, but hope is not a plan.If we do not take the subtle message from CalPERS serious, more than 10% of Venture investments in the United States could suddenly disappear, with many other LPs quickly following suit. And that means that (once again) the deployment of an incompatible financial system destroys the innovative capacity of those that deserve better.My answerSo, my short answer to Joe's loaded question was: "Sub-prime Venture does not scale, but Prime Venture does". The currently deployed economic model of Venture will never scale, and here is why:Ten levels of diversification with multiple (hybrid) relationships from LP to startup investment makes it impossible to identify the real merit and performance of VCs and the validity of their investment thesis.A (loosely coupled) commoditized investment thesis can never outgrow its peers, and thus is incapable of generate meaningful alpha. Sub-prime VC systemically destroys the trust of Public Markets by pushing so-called innovations through the funnel, soiling the opportunity for more discretionary value.The necessity to produce public valueIt is a bad idea to ignore the public's perception of Venture Capital. With a large sum of Venture money (roughly $1.9 Trillion) over the last 10 years producing no substantial public value by way of IPO, sub-prime VC has lost the confidence of the public that does not only supply the money to VC (indirectly through the public pension funds, endowments etc.) but is also expected to buy post-IPO stock on the public stock market.So, rather than to continue with "the models for success that have worked for our industry in past decades" as many of the NVCA cohorts continue to preach, we need to rely on a new economic model that fundamentally changes Venture Capital to its core. Our proposal in the presentation "2010: The State of Venture Capital" will do so and it scales because:Our Venture model removes the diversification at the bottom of the Venture equation, exposing VC matchmaker merit and accountability.Our Venture model employes dynamic marketplace merit, not static institutional merit. Our Venture model attracts unique investment theses that have the ability to find the outliers of innovation. Incompatible financial systemsThe problem with Venture is that traditional financial systems (stemming from more conservative asset classes and times) are incompatible with the risk and returns that early stage Venture has to offer. Over time the old financial system has steadily suffocated, and worse alienated disruptive innovation, by forcing sub-prime innovation through an exit funnel that as a result left a trail of eroded trust. Venture has lost trust with public markets, but even more so with the outlier entrepreneur. Truly disruptive ideas do not even show up at the doorsteps of many VCs any more, because certain corporations have become better custodians of innovation than venture capital (remember those ludicrous buyers/sellers-market arguments of VCs). Change the dating serviceBut just because VC is broken does not mean innovation is. We need to re-establish the merit and definition of disruptive innovation and stimulate the creative and intelligent minds that can spawn it. The Internet provides a massive opportunity to tap into the buying power of 5/6th of the world population that is still technologically disenfranchised. But if we leave the Venture Marketplace functioning the way it does today, less money-in will not change the alpha (portfolio returns) for Limited Partners. Survival of the fittest in a dysfunctional market is a worthless asset. Superior EconomicsSmart Limited Partners stay committed and realize that Technology Venture has superior economics, that with the right economic construct has the ability to outperform any other asset class. Technology feeds the brain in the same way water feeds the body. Technology can be served up in many ways to produce, share and monetize knowledge, just like water can be used to produce soup, coffee, tea or anything else you can think of. We have all the ingredients in this country to make lovely dishes, all we need is a better economic system to attract the right chefs with scrumptious recipes.The new size of Venture CapitalSo, stop making statements about whether Venture Capital should be smaller or larger. It's a futile discussion. The size of an inefficient marketplace is irrelevant and thus by definition wrong. First we need to deploy an efficient marketplace (that is designed to find the real merit of innovation), before we can make educated guesses about how to best support it with a proper financial system and size. Lowering the commitment to Venture Capital does not create more efficiency, changing the marketplace does. So, LPs need to deploy a new economic system that systemically roots out sub-prime. The solution that scales to its authentic potential is here today.
• How LPs in Venture have been fooled, many times over 5 February, 2010, 8:45 am
  By Georges van HoegaerdenA fantastic television ad by Ally Bank, in my view best describes how Limited Partners (LPs) as the investors committed to Venture have been fooled. In the event you have not seen the video, it shows a slick man in a business suit sitting cosily around a kids table with two little girls. The suit then asks one girl if she would want a pony. When she replies yes, he hands her a toy pony. He then moves on to the second girl and asks her if she wants a pony, and then calls in a real pony. Clearly the first girl is upset that she did not get a real pony and complains, upon which the man replies, "well, you didn't ask."What pony did you ask for, by virtue of your actions?That is exactly what has happened to LPs in Venture who did not ask the specific questions that could have led to their success in Venture. In many cases those LPs failed to generate impressive returns in Venture because they did not know they had to ask specific questions and should have taken control of the situation in order to get the results that the sector is able to generate. Many LPs, glowing at the early return profiles of Bill Draper, Vinod Khosla and other early illuminaries, simply said "yes" to General Partners (GPs) who asked LPs if they wanted Venture returns, without even asking how much (see the many PPM's that do not even have clear return targets). And of course now, many LPs are utterly disappointed and mistrust the GPs (and worse the sector), similar to how the little girl in the video now mistrusts the man. Ask the right questionsTo help make clear to LPs what questions to ask I have added a new section to the wildly popular presentation 2010: The State of Venture Capital, the Prelude (posted on Slideshare) describing how an LP thought his commitment would be applied, and how it was in reality. See for yourself:We pride ourselves on a solid and no-nonsense understanding of the Venture ecosystem, top-to-bottom, which is crucial in leading to a permanent fix in Venture and to improve its performance. So, we back up our rational on the right side of the previous slide with the observations of how the Venture business really operates today. And here is how the rubber meets the road:The bottom line is simple. It is okay to deploy your money as an LP through GPs as the arbiter, but just like many Hollywood stars have found out, if you are not signing your own checks, know what they are being spent on and how - don't be surprised your money will be taken for a ride. It is the nature of letting go of financial control (and really, you should not be surprised).Today's Venture pipes are still being pumped full with subprime deals, which means the ten-year outlook for Venture will not look much different from its miserable ten-year past. So, the time to act is now if you expect a different outcome in ten years.Take controlThe Venture business needs to be reigned in, with controls put in place so it can no longer be taken for a ride. The sector has a bright future ahead, with massive market-pull from the majority of people in this world who still crave technology solutions to improve their lives. The only way we, as the most innovative nation in the world can screw it up is to deploy a piece-meal financial system that misses its intended target.That has to stop, right now. Dear LP, a permanent fix to Venture, by way of a new economic system you can deploy, is waiting for you. Act now or forever hold your peace.
• 2010: The State of Venture Capital, now public 31 January, 2010, 9:26 am
  By Georges van HoegaerdenTop presentation of the day recognition on Slideshare. New slides added Feb 22nd, 2010.More than 150 money managers (including some VCs) have received a controlled prerelease of the previously announced 2010: The State of Venture Capital. What this presentation is not: • This is not another numbers deck: clearly not everything that can be counted, can be counted on... • This is not yet another self-written report card from venture capital lobbyists • This is not a blind prayer for hope of a better futureWhat this presentation contains: • This is a reflection of the effectiveness of Venture Capital from the point of view of a successful entrepreneur; first hand observations • This is a top-down analysis of the Venture ecosystem for Limited Partners • This is a permanent fix to Venture and a methodology for LPs and Fund-of-funds of how to re-commit (TVC customers only)The Prelude to the permanent fix of Venture Capital is available right here (click Full for a full-screen version):2010: The State of Venture Capital, Prelude (Updated)View more presentations from Georges van Hoegaerden.The underlying arguments to support the slides may not be clear unless conveyed personally, and I would be happy to set up a conference with more stake holders in the venture business that have the interest and capacity to change it. Feel free to make comments, ask questions by using the online form, e-mail us or contacting us by telephone. The top-down fix to Venture Capital is reserved to Venture Company customers, embodies a new market system and provides fundamental differentiation to Limited Partners and Fund-of-funds managers and a permanent solution to the malaise in venture. The world of monetizable innovation has changed, and we need to change with it. Venture should be and can again be, with a restructuring, the best performing asset class (sector) to money managers.
• The problem with Venture: no true Alpha and no true North 29 January, 2010, 8:48 am
  By Georges van HoegaerdenI am talking to a lot of Limited Partners and Fund-of-funds managers these days and the reputation of venture as a viable asset class (sector) is really bad (even though the opportunity dictates it shouldn't be). Few people at the top of the investment food-chain seem to have a good sense of what it going on down below (with General Partners at VC firms), and even fewer believe a further commitment to venture makes sense. Our government adds to that mistrust by not even acknowledging venture as a viable instrument to resurrect innovation. No True AlphaBut can we blame them? The returns (of the portfolio of investments, some money managers represent by a formula that yields "alpha") in the venture business have been deplorable from many angles:From a Limited Partner (or Fund-of-funds) perspective; with less than 10% IRR over the last 10 years and less than 3% of $2 Trillion invested yielding public value. From an economic perspective; more than $1.9 Trillion of (mostly) public money has been wasted in the last 10 years on so-called innovations by venture that never generated any public value. From an entrepreneurial perspective; the definition of innovation has severely eroded by the subprime nature of the investment thesis that makes it unattractive for meaningful innovation and real entrepreneurs to be discovered. From a consumer perspective; we have created no more than a handful meaningful innovations with an army of 800 Venture Capital firms chomping at the bit. We have eroded the trust of the people we aim to serve and those we rely on to spawn a high-flying public offering.No True NorthNo True Alpha is the result of a defective compass of the Venture Capitalists (VCs) - arbitrating the money-flows - that is no longer pointing towards True North, but rather Magnetic North. In this context Magnetic North defined as a gamble with someone else's money, a very lofty salary and no downside for the next 10 years. Should we really be surprised that without transparency and accountability Magnetic North is much easier to achieve than True North?Other temptations of Magnetic North are misleading VCs even further:Target acquisitions: many startups are funded and built with improper expectations. While exciting in nature for many, the past bull-market flurry of acquisitions misleads VCs to believe that they can target one. Yet most acquisitions of early stage technology companies are completely erratic (I can tell you many buy-side tales), because they are primarily based on internal corporate struggles rather than somewhat predictable, external market indicators. Exit at underperformance: we are soiling the acquisition pool. Acquisitions, in the majority of cases do not work out for the acquirer and are very often overpriced, overhyped and under-deliver (I can talk about many experiences here too). Usually not by design, but simply because they lack macro-economic value to begin with. And while money is money, every acquisition that does not deliver deflates the valuation of the next innovation that deserves better and therefor negatively impacts portfolio returns.Stay away from IPOs, the window has closed. I always smile at that popular phrase by VCs and reply: if I want fresh air I will open a window. The public mistrust we have created by pushing subprime innovations through the IPO funnel for the last 20 years, has quickly developed an innate scrutiny to invest only in what the public understands and what matters to their life. Macro-economic impact of innovation is the only value that can pass these days and VCs have restricted their thesis to the extent that they just do not know how to find and fund those. Our focus should be on building real companies, not technology gimmickry. Inappropriate deployment of risk: their lack of relevant market experience forces VCs to focus on the only thing tangible to them, the technology implementation. And that while the creation of technology is the least of the risks in a technology venture. What matters, again, is the application of technology to a viable marketplace. And so the risk is in identifying and fully addressing the needs of the marketplace, with whatever modern technology does the trick. There are many other magnetic distractions that keep VCs from reaching or ever pursuing True North, some of which I have covered in other places in my blog, but that laundry list would go beyond the patience of my readers. From isolate to insulateThe point I am making here is that no-one should be surprised that venture is not performing. The LPs were there to allocate the money, the entrepreneurs were there to dream up innovation, and the public is still yearning for technology innovation to substantially improve their lives. The problem in Venture is the derivative, the Venture Capitalist who without economic viability has no political leg to stand on to stay in business. We have isolated the problem: the "referee" is in trouble, not the players nor the game. Now we just need to insulate the problem, and the controls are solely in the hands of discerning LPs and Fund-of-funds that need venture to perform.A simple fixThe solution to a healthy Venture climate is simple (in the same way e=mc2 is simple, its discovery took me and Einstein a while); change the construct of venture investing so it mimics the meritocracy of innovation that can produce uniquely disruptive value.The impetus of that new model can be found here, the actual fix by contacting us here.
• New York, an empire state of mind 21 January, 2010, 8:30 am
  By Georges van HoegaerdenI always love being in New York and last tuesday I attended the AAAIM 2010 Investment Themes event in New York (a fairly closely held affair, thank you Brenda Chai) with a keynote from John Liu, newly appointed New York City comptroller (closely guarded by his security detail) and other luminaries from the New York investment world, including Kelly Williams from Credit Suisse Customized Fund Investment Group, Marcos Rodriguez from Palladium Equity Partners, Jimmy Yan from New York City Employees' Retirement System and Peter Marber from HSBC. All speakers (and attendees) manage multibillion (double and triple digit) dollar funds and what struck me was how little these top managers know about venture, except to frown or stay away from the sector given its miserable performance and reputation for the last 10 years (we describe in my blog often). There is clearly more work needed and opportunity to be gained to resurrect the face of venture and to establish new faith and trust. That trust of-course can only come from being honest and critical about past venture performance and offering a clear rational and remedy to resurrect it. Exactly what our focus has been for the last few years.Now, I am not a journalist and I am not going to go into the many personal conversations I have had with regard to venture investing, yet I do want my readers (specifically those interested in venture) to understand how some of the financial pressures will impact venture directly, indirectly or potentially, as could be surmised from the speeches of the public speakers. And, the more every venture marketplace participant knows about its dependencies (especially from the Limited Partners at the top of the venture food-chain), the more we can each respond to and secure a better future for a sector that, in my view and with my venture model, deserves much more commitment than 10-15% of overall LP commitments.The State of the CityBoth New York City and New York State have raked up sizable budget deficits. New York Sate has a $7B deficit and New York City as the nations 4th largest government with a budget of $60B has incurred a $4B deficit. If comptroller John Liu has his way the deficit will not be hidden under the rug by borrowing money, but lowered by cutting expenses and/or raising taxes to erase the deficit of about 1/5th of the flexible $25B part of the total budget. The City is looking for creative ways to achieve those savings objectives. A question from the audience raised about increasing taxation on $25B of newly issued Wallstreet bonuses was quickly and politically sidestepped by forecasting its prospective value to only yield $0.5B, assuming those bonuses were all distributed in liquid form. In addition the comptroller stated he prefers to find more long-term solutions to erase the deficit, essentially leaving the contentious issue of dealing with Wallstreet up to the President.Limited PartnersJohn Liu is also custodian/board member of 4 of the New York pension funds (including NYCERS with $35B under management), comprising of $100B in assets. No mention of fund performance (we know from other sources more or less what is going on) but he expressed specific interest in widening the network and making it easier for small new asset managers, with unique industry experience and merit to participate in the deployment of diversified assets. As you can imagine, after having written for years about the lack of verifiable investor merit at the bottom of the food-chain, I was enthused to hear the comptroller usher rudimentary free-market principles as its new goals in deploying monetary assets. The proof of-course is in the pudding and I hope to meet with his people soon to exchange my macro-economic views on how financial systems aught to work. GlobalizationAnother highlight of the evening was a great overview on emerging markets by Peter Marber who runs emerging market investments for HSBC. Peter stressed the need for a renewed focus on emerging markets, supported by some interesting statistics and the use of "The Mac Theory" (I've heard before), not a macintosh this time but a MacDonalds Big Mac. He simplified the value of a currency by comparing the price of a Big Mac in a country with the price of a Big Mac in the US. The difference yields a fairly accurate view of the expense of doing business in the juxtaposed country.According to Peter, emerging markets cover 6 Billion people who cover 77% of the global landmass. He sees new opportunities in what he calls shifting democracies, with Japan's economy growing at a 4% rate versus a growth rate of 2.5% for the US. Emerging market debt has grown by 171% and global equity growing by 82%, while US equity has declined 24%. BTW: Just yesterday it was reported China's GDP grew a stunning 10.7% in the 4th quarter of 2009.Peter comes across as savvy asset manager with his feet still firmly planted in the ground, a practicality we can never have too much of. Peter's global viewpoints are well put and he expects that venture will remain (for now) a US dominated opportunity as long as the products we build have (immediate) global market impact. I concur, as long as we free innovation from the choke hold of our current venture system.New York, your lights continue to inspire me.
• A new way in is the way out of Venture 11 January, 2010, 6:21 am
  By Georges van HoegaerdenMany Limited Partners are contemplating getting out of the venture sector altogether and end their commitments to Venture Capitalists (VCs), no surprise given the sector's miserable performance of less than 10% IRR the last ten years and no more than 3% of moneys invested producing real public value.Flight is a natural, but inappropriate responseThe technology sector has a long way to go in supplying 5/6th of the world with meaningful technology applications. And with more (global) entrepreneurs at the ready to tap into that wide open greenfield the pain in the venture business is not with supply and demand, but with the arbiter in the venture business - the venture capitalist.I often use a simple analogy to make this clear: just because the performance of eHarmony (a leading dating site) is down, does not mean we necessarily have fewer potential marriages. It just means the marketplace (see our new Venture Primer) where those connections are being made is inefficient. Smart participants will seek to explore new marketplaces where the arbitrage fits their requirements and so should Limited Partners. Expect absolute, not relative Venture performanceMany VCs who smell the impending cannibalization of their cushy, no downside position throw anything at Limited Partners to make them recommit for another ten years at the expense of public money. VCs continue to use any tactic in the book to persuade Limited Partners that none of the malaise in venture was their fault. Aided by the conglomerate resources of their lobbying organization, the NVCA (the National Venture Capital Association) they drum up every statistic and external market factor known to man to hold on to their position in this ailing sector. The mere existence of a lobbying organization (with international branches and replicas) alludes to the deployment of artificial market forces and should be a wakeup call to those depending on it.But great performance in the venture business should not be measured relative to other VC funds (using meaningless self-serving top quartile accolades), or worse be measured against public market indices, but should be measured against the opportunity to monetize the penetration of technology in its global greenfield. To use another analogy: The best athlete is not one that wins the race, but the one that becomes the fastest man on earth. The best of the worstNow, I know the job of Limited Partners is to deploy assets (surplus cash) and get the best possible yield for a given time period on that commitment and lockup, without a loss and better, a significant yield. To the Limited Partner it is a game of responsible diversification to a spread of asset classes in which not the individual performance matters, but the yield of all assets under management. Venture, as one of the avenues with an average allocation of between 10 and 15% of total assets under management has been for many Limited Partners just the "icing on the cake", a nice to have but not a necessity. Until the other asset classes started imploding. Hence the reason why many Limited Partners first were reluctant to criticize VC and now suddenly debate to leave the sector altogether. Some VCs have gone out on a limb and publicly cheered that on, forgetting that - using our previous analogy - a select few may have won the last ten year's race but that their absolute performance still does not make for a great spectator sport. Especially not since their reason for winning is comparable to a winning streak in Vegas, sheer luck and unsustainable. Technology Venture should outpace any other asset classIn any economy, Technology Venture should outpace any other sector or asset class for Limited Partners with a ten year horizon, simply because of the following reasons:Technology is a low cost production business (not a derivative) that capitalizes on the unwavering intellectual brainpower of global entrepreneurs to tap into existing macro-economic needs.Technology taps into a massive greenfield consisting of 5/6th of the world population, and is only at the beginning of its exploration.The internet provides a zero cost distribution channel that feeds relevant new technology directly and instantly to massive market pull.The fluidity of technology implementations allows disruptive technology to quickly respond and become resistant to economic aberrations.Technology relies on nothing but itself to create and maintain instantaneous value, the only volatility in venture is venture itself.A new way inWhat is broken in venture is the VC as the arbiter, who claims to have the ability to spot disruptive innovation but has not delivered, some say for the last twenty years. The commitments from Limited Partners are still flowing and so are the unwavering ideas from entrepreneurs. All that is needed is a different arbitrage that has proven to spawn highly monetizable innovation against the (absolute) spectrum of a massive technology greenfield. The existing crop of VCs may not get there, as cannibalization of a complacent position will be painful. But I am sure that if we replace every VC today with an experienced former startup entrepreneur (with successful company growth under his belt) we will quickly produce results far better than the last ten years. The past is the past, so let's not dwell - but get rid of it.I can't think of any asset class with a better risk profile that within a ten year vintage has the propensity to deliver stellar results. But only with a few new rules of the game and referees that have the wherewithal and experience to make it happen. The instruments of change in its tremendous rewards are in the hands of Limited Partners who remain committed to technology venture. So, we should treat Venture for what it is: the fastest athlete in the world. And recruit trainers who can get it there.
• Why Einstein would be a better VC 6 January, 2010, 10:06 am
  By Georges van HoegaerdenI think about the future of Venture Capital a lot (day and night, can you tell?) and how we can continue to drive and fund innovation. And I have said many times that "the quality of the deal intake is only as good as the quality of the investor", which specifically in venture means that an investor needs to have the experience and foresight of an entrepreneur to support others. Raise the (public) value of innovationClearly with truckloads of money from Limited Partners over the last ten years, more highly skilled global entrepreneurs than ever, and 5/6th of the world population still void of essential technology applications, VC has done a deplorable job in the matchmaking process between the assets of the Limited Partner (money) and the assets of entrepreneurs (ideas), which should have tapped into that massive greenfield more aggressively. Less than 10% IRR for more than 10 years, or to use another worrisome statistic: less than 3% of dollars invested in VC over the last ten years leads to the production of any public value by way of IPO (Initial Public Offering), as 10 years of VC investing at $200B/year (give or take) x 10 generated $66B in IPOs (per Dan Primack, PEHub). No wonder the Limited Partners who fund VCs scratch their heads at what just happened to their money.It's all about the Benjamins (and the quality of people behind the money)I referred to Albert Einstein before (way back in 2006) and an amuzing article from Dave B Lerner turning Sherlock Holmes into a VC reminded me how the principles of Einstein should be held against the selection process for General Partners (GPs) at a VC fund. Quotes from the GeniusSo, with Einstein's Wikipedia encyclopedia at hand let's roll out some of his famous quotes and see how the current state of venture stacks up:"Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world".So why do GPs demand to see a product demo before they can decide to invest, is it because they have no imagination? Perhaps we should encircle a world of innovation that is bigger than Silicon Valley?"For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution. It is, strictly speaking, a real factor in scientific research".Why a SuperBowl ring is so much more valuable than an Ivy League ring, in any job in the venture business. "A new idea comes suddenly and in a rather intuitive way. But intuition is nothing but the outcome of earlier intellectual experience".Why relevant entrepreneurial experience is such an important attribute to a VC investor, intuition not analysis drives the selection of rewarding investment decisions."Whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed".Silicon Valley has commoditized the investment thesis (or what we refer to as the-same-difference investment thesis), no surprise that it cannot detect disruptive innovation even if it would show up at their doorstep."Falling in love is not at all the most stupid thing that people do — but gravitation cannot be held responsible for it".GP should not be afraid to feel passionate about their companies and make independent investment decisions (that may not find other syndicates), but the gravity of investment commoditization can not be held responsible if they do not. "It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience".Customers need simpler technology solutions, not more complex. As investors that means we should not invest in technology, but the application of technology to meet customer needs. But not so simple that it has no macro-economic and public relevance (IPO). "Humanity has every reason to place the proclaimers of high moral standards and values above the discoverers of objective truth".A higher moral standard in the venture business would ensure that we deploy free-market principles to the support for innovation. We are far removed from deploying transparency to the venture business that would expose the true merit of investors with the true merit of entrepreneurs. Only then will the truth reveal itself. "A happy man is too satisfied with the present to dwell too much on the future".GPs locked up into 10-year fund vintages are fat and happy, too happy to dwell to much on the malaise in venture."The state of mind which enables a man to do work of this kind is akin to that of the religious worshiper or the lover; the daily effort comes from no deliberate intention or program, but straight from the heart".Great convictions from the heart lead to great investments and financial returns in venture. The investor who is content with the current investment program will soon meet his maker. "I am by heritage a Jew, by citizenship a Swiss, and by makeup a human being, and only a human being, without any special attachment to any state or national entity whatsoever".We are citizens of our world, so perhaps we should start investing that way. We need to get away from Sand Hill Road more often and tap into global resources, not just to fund entrepreneurs but also to experience and understand what drives global marketplaces. "Concepts that have proven useful in ordering things easily achieve such authority over us that we forget their earthly origins and accept them as unalterable givens. Their excessive authority will be broken".Just because we have constructed the relationships between Limited Partners and VCs in a certain organized fashion does not mean we should accept them. Especially not when performance proves the vast majority of those relationships do not work out to satisfaction. "Great spirits have always encountered violent opposition from mediocre minds. The mediocre mind is incapable of understanding the man who refuses to bow blindly to conventional prejudices and chooses instead to express his opinions courageously and honestly".Entrepreneurs should expect to receive violent opposition from mediocre VCs (who focus on technology builds), but entrepreneurs should remain courageous and honest. Courageous in their entrepreneurial ideas and honest about their ability to build them. "The important thing is not to stop questioning; curiosity has its own reason for existing".Many people take for granted what has been imprinted in their brains from childhood, but you would be surprised to learn how many of those things are actually false. Not by design, but by interpretation. Drill deep in what you have been told as the truth and you will find new opportunities for innovation. "Nature shows us only the tail of the lion. But I do not doubt that the lion belongs to it even though he cannot at once reveal himself because of his enormous size".A Long Tail without a Torso is meaningless."What is thought to be a "system" is after all, just conventional, and I do not see how one is supposed to divide up the world objectively so that one can make statements about parts".Markets do not exist, as I have stated many times before. Only marketplaces do, in which the choices of individual participants with unique ideas are married. "Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions".The social environment on Sand Hill Road that has perpetuated the mediocrity in venture is preventing GPs from expressing opinions about how it should change. In fact, none of the Limited Partners I spoke to have received a viable plan from VC as to how to combat the venture malaise we are in."My political ideal is democracy. Let every man be respected as an individual and no man idolized".When you do not belong to the (subprime) "venture club" or play their game, you are not let in and respected. So why should we repay that homage back with idolization?"The really valuable thing in the pageant of human life seems to me not the State but the creative, sentient individual, the personality; it alone creates the noble and the sublime, while the herd as such remains dull in thought and dull in feeling".Meritocracies are created by transparency, and we have none in venture. No surprise it is dull in thought and dull in feeling."My passion for social justice has often brought me into conflict with people, as did my aversion to any obligation and dependence I do not regard as absolutely necessary".Free-markets are created by meritocracies that rely on transparency. The social justice of a meritocracy is hard to grasp for those who hide behind walled gardens to protect their own insecurities."Mistrust of every kind of authority grew out of this experience, a skeptical attitude toward the convictions that were alive in any specific social environment — an attitude that has never again left me, even though, later on, it has been tempered by a better insight into the causal connections".I mistrust many venture investors for good reason (their lack of merit), but have learned that the casual connection is the dysfunctional financial system that allows VCs to take it for a ride. "Everyone is aware of the difficult and menacing situation in which human society -- shrunk into one community with a common fate — now finds itself, but only a few act accordingly".Waiting, talking and reporting about the malaise in venture is one thing, offering solutions to it is another. "The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of the evil".That is of course because the only form of capitalism we practice today is far from a meritocracy. Capitalism spawned by meritocracy is a wonderful thing and builds opportunity for all people with merit (within the Long Tail and the Torso). No need to be Einstein to become a VCEinstein himself did not think he was special and neither should a VC. All you need to become one is solid early stage experience and a vivid imagination of how the world should work. Yet to make venture work, Limited Partners need to start by deploying money to GPs who themselves have proven how those crucial attributes helped them cross the chasm, before those GPs are allowed to tell other entrepreneurs how to do the same. My investment and drive is for democracy, meritocracy and capitalism to work hand-in-hand to produce the powerful innovation that enhances the lives of people around the world. Until that happens, I leave you with a last quote from the Genius himself: "To punish me for my contempt of authority, Fate has made me an authority myself".Happy New Year!