No doubt you’ve heard that the finance system is broken (sic). Banks, hedge funds, investment banking…the list goes on and on of those in the finance ecosystem that have broken business models, economics, and portfolios from taking on excessive risk. But there is another very important finance player that is broken but for the complete opposite reason. Venture capitalist firms have been an important player in spurring innovation and creating successful companies for more than 40 years; helping to early-stage fund companies such as Intel, Apple, and Google, just to name a few.
VC firms used to be run by successful entrepreneurs who combined their money with institutions and other high net worth individuals to make investment into promising technologies and companies. These VC entrepreneurs often had multiple successes and were good at identifying opportunities, mentoring founders, and directing companies. This all changed with the VC boom in the late 90’s when being a VC became trendy and a career path for MBA’s. Now VC firms are filled with Ivy League finance MBA’s who have little or no business start-up experience, nonetheless any business success. VC’s now see venture capital investing as an exercise in risk management, just like any established investment, versus the traditional VC goal of opportunity identification and cultivating.
I’ve been on both sides of the VC world over the last 10+ years and seen first hand this monumental shift break the VC business model. Money alone does not make inventors and innovation succeed; it takes the art of entrepreneurship to build a business. This art is now missing from most VC’s, who kill most opportunties (funded or not) by over risk managing investments and over engineering investment structures. These two techniques are sure ways to kill innovation and start-up businesses.
Proof of this problem with VC’s has become more public with the current financial meltdown. At a time when VC’s should be increasing their investments in start-up and early-stage companies because valuations are down (caused by recession and capital markets) and crisis is leading to innovation, VC’s have halted most investments. While some VC’s did have problem with their own fund raising process due to the seizure of the capital markets, there is still plenty of money available for investment sitting in VC’s funds. Distressed assets, CDO’s, MBS’s, the stock market, and all the other broken financial models have nothing to do with VC investment success.
Unfortunately, this risk management attitude is even affecting angel investors; the first seed for many successful companies. As angels have become more organized and many non-entrepreneurial investors join the angel groups, they’re focusing more on risk management and less on finding and nurturing good ideas and opportunities. Risk managing an idea for a business or product is like pruning a seed before it sprouts–it kills it.
For the U.S. to pull ourselves out of this recession, it is going to take innovation and entrepreneurs with the support of opportunity seeking investors to create new businesses and industries. So I’m calling all serial entrepreneurs back to the VC ranch to take it back from quant-addicted MBA’s who don’t know what it takes to find and build successful businesses…and return on investment.
(Note–I have my MBA and hope to make investments in start-ups some day as well, but I’m still working on getting better as an entrepreneur (more than five successful ventures already) before I am bold enough to make it a career.)