Corporate transparency

Owen Byrne
Wed, 9 Jan 2002 02:35:43 -0400

On Tue, Jan 08, 2002 at 09:46:18PM -0600, Jeff Bone wrote:
> Owen Byrne wrote:
> > You're in Silicon Valley, I guess, or somewhere where money grows on trees.
Ok, used to grow on trees. 

> Here's a few factoids that may amuse you about venture capital:
> * >50% of all VCs (individuals) weren't investment professionals before 1996
> * >50% of all investment *into* venture funds, ever, happened after 1998
> * the bottom quartile of the '98-'99 venture fund vintage is expected to return *no money*
> * the top quartile is expected to return on average 1.5x --- compare to 7x expectation
> These guys are reeling.  They don't know whether to shit or get off the pot.  All funds are currently fighting a war on four fronts:  standard war -w- the potential investments, war
> with their limiteds, war with co-investors on existing deals (which continue to hemorhage money as they are forced to throw good money after bad to salvage ROI) --- and intrafund wars
> between partners involved in older funds (which want dollars from new funds to save old dogs) and partners who came in with newer funds and have no carry / economic incentive from the
> older funds.  Net-net:  total and complete investment gridlock, fear, panic.
> Daily, I've lived with the gritty repurcussions of this reality for over a year now.  When these kind of abstract things impact what kind of Christmas presents I'm buying and how often
> I'm taking my girlfriend out to eat (and where) then you'd better believe that I suffer no illusions about where money comes from.

Ditto. At least I'm in a low-rent part of the world, but its also a no-income part of the world. 

> Trees?  Whatever, dude.
> BTW, Texas, not Silicon Valley.
> > - now tits up - which was at one point the leader in the online photo
> > archiving business - is just down the street from me.
> Sounds like a dumb idea to start with.

Perhaps - but it was dumb idea that got funded., photopoint. It seemed to be easier to got dumb ideas funded. 

> Remember what I said about investment professionals?  The downturn is subjecting many of those to the same kind of fitness test that it's running on the entrepreneurs.  Poser
> entrepreneurs?  Gone.  Poser venture capitalists?  On the way out.  Advice like the above, from your VC?  Was dumb, is dumb, will always be dumb.  You can't just blame the geeks, or
> the Valley culture, or the entrepreneurs.  The VCs have to take some of the burden.  They (among others) created the bubble and then guaranteed the burst by pumping stupid money into
> silly things that never had any chance of being real businesses.
I think the VCs should take almost all the blame. Dave Winer had a link to an article from about how no such shakeout is happening in the VC companies.

> > Think they're going to need personal guarantees the next time around? I think they would probably prefer mortgaging their houses to dealing with VCs again.
> All I've got to say is, go spend over a year getting something funded and then you'll have both a deep enough understanding of entrepreneurs *and* venture capitalists to have this
> conversation with me.  Cheers, and good luck.

I don't have a hope with the VCs. Don't have the right background. I know that (like 95% of entrepreneurs) have to build my business from the ground up, on my back. 
VCs? Lets just see if I can get a $3000 loan on my accounts receivable. 

Here's the model for startups in industry after industry until the great VC/Internet WealthFuck:

B-School student goes to work for Fortune 500 company selling widgets. 
Works 15 years, saving money and learning about the industry. 
After rising through the ranks, spots an opportunity and sinks all his money into it,
working at home until he has enough cash-flow to leave the company and manage his new
venture. 5 years down the road he's built a successful business and can start thinking 
about venture capital and IPOs.

Other than the sales part, that's me. But the VC's are looking for 25 year old Ph.D. candidates (okay, so I'm a 41  year old Ph.D. candidate).  

> > Actually the fact that you have been through numerous complicated incorporations without
> > experiencing a practice that most things I read has become prevalent says something
> > about information-sharing, doesn't it?
> I can't parse this at all.  Oh wait, okay.   Well, all I'm saying is, don't believe everything you read.  Personal guarantees?  Maybe if you're trying to fund a real-estate deal.  It
> just doesn't work that way in the technology industry because (usually) the guys with the opportunities usually don't have the financial wherewithal to give them, and the guys *with*
> the financial wherewithal are often considered to "not be hungry enough" to make interesting things happen.

And 20 years ago you weren't hungry enough unless you had a wife, kids and a mortgage to pay. Why is it with all the education in the world, the caveman mentality 
continues to control all the money. Actually I have seen that "hunger" is a motivation for requiring personal guarantees - if you're not willing to invest
some money (even if its next to nothing) than why should anybody else?

What I was saying was that the model of funding that you are involved with is an aberration specific to the dotcom industry, and that for the vast majority of
entrepreneurs not available. The people who host my server described their experiences raising money here - sounds sort of like yours - a year of frustration and 
humiliation. They were successful though - they got a $50,000 low interest loan, backed by a note on the president's house.. 

Basically there are two models for startup - my entrepreneurship books calls them high-potential firms and foundation firms. The first are those with potential 
for high capital gains, and are what VCs are looking for. And frankly, there should be less and less of these as an industry matures. The second are described as
companies that "generate enough money to compensate fully those involved. And there should be more and more of these now. 

You've been involved with the first, I've been mostly involved with the second. Its a point of debate as to which is a more successful strategy. There 
is no debate about which makes more money for VCs.

"In the tech field, always has been, always will be." So when all the poser entrepreneurs and the poser venture capitalists are gone, the system that created
them and promoted them will still be present. Generally when people say that its this person or that group (poseurs) that are causing problems, I generally 
think "Nope, probably the system."

> Canada!  Why didn't you say so!
Surfing from Nova Scotia. Why do you think I do all the bitching and moaning about the US? Cause they won't let me in. ;-)