musings...

I think Venture Capital and Angel investing is broken. I know that many in the industry think it is too.

You see VC, and to a smaller extent angel investing was always about the exit, about how to make a decent buck on a great trade sale, or the Grail Quest of VC: the IPO.

The dust up and collapse of markets worldwide has killed that, at least for now, and that means trouble.

There are some positive sides to this too: the days of hundreds of millions being poured into a start-up without a revenue model are behind us, at least for a while, and I don’t think that’s a bad thing.

But what about those great ideas now languishing on people’s hard drives waiting for a chance to see the light of day? In essence: what are we going to do about it?

Firstly, I think it’s going to be back to basics. Cashflow has always been king in the land of start-ups, and that is going to remain the case.

It also means that other bug-bear is back: bootstrapping.

I want to state on record: I hate bootstrapping. It means focusing on non-core activities in order to, well, bootstrap a business. It takes focus away from creating great products, and puts the focus on making revenue. Any revenue, by any means (legal), and I don’t think that’s good for innovation.

However, needs must.

I do think, however, we need to rethink our approach to business planning, and think smaller. Not because I think that is good, because I don’t. But, because I think that’s what we need to do to make business innovation continue during the months and years ahead.

Don’t think I’m being too negative either. There is still good VC available out there for those ideas that can scale and change the game. Angel investment is still around too. But the end game is different.

We’ve got to think about building businesses that are built to last, on their own, with no white knight in shining armour VC coming along after year two or three to help them scale, and that means we have to think about strong management and teams much earlier on.

Why? Well, typically, start-ups build out teams based on technology – engineering-focused – and if there is one thing that I’ve learned over time is that these types of teams don’t scale well, and run into problems as a company grows.

Instead, we need to think stronger management, sales and marketing skills from early on, because it is those kinds of management teams that can take great engineering forward to scalable companies.

The problem is: how do you attract those kinds of teams to early stage companies? Remember, they don’t have money, or much, and aren’t likely to get a huge infusion from VC along the way.

One way is to address the equity issue. This is where the largest majority of equity is tied up with the founders, with the rest of the company getting a very small pool of shares to share. This has worked when there was to be an “end game” liquidity event, but if that’s off the cards for now, then long-term investment by people in a project needs better equity rewards, such that if they stick around for a longer period (waiting for the IPO market to recover) then the core team will need more like 5% each, rather than a share of 5% in total, for instance.

Also, there will be a greater need to think profitable from early on. That means a business model. One that works. And scales. This will take innovation on the business side, not just the engineering side. That is often lacking in today’s start ups.

Another thing we will have to consider, if we are to create and grow businesses, is that we might have to hit that need of off-shoring certain functions. Yes, I know, I know: it’s unpopular, particularly early on, and hated even when you are making money, but here’s some bad news for you: it’s expensive to hire good engineers in “the West”. In that case we’re going to have to get really good at managing dispersed teams. How are your skills?

My view is, VC is currently broken. It will mend, but it will take some time. Maybe a lot of time. So we have to make choices, and one of those might be to put off a start up for a while. But innovation is about getting your game changing idea to market first, and so waiting might not be an option. If not, we will all have to make compromises.

One thing I think we should try more of is in-house intrepreneurship, or perhaps more incubator VC’s, where a whole bunch of ideas are given a very small amount of money to see if they can work. The risk is about the same (in terms of numbers that will fail vs those that will have legs), but the money involved will be almost trivial, compared to what we do now. However, there is a bigger downside to this approach: teams.

Teams need to be put together to gel and that takes a while to do, and nothing gels a disparate team like a little success, and that is harder to do with less money, and the teams, by necessity will be smaller (not always a bad thing), and that means there will be essential skills missing, and that can be a killer if you’re bootstrapping.

As a direct result of all of this, there should be bigger role for angel investment, but, alas, one area that is hit by the global melt-down is angel investors, as people have less spare cash generally.

It’s not all doom and gloom, and WE HAVE TO find a way, because entrepreneurship is the way global businesses are built: one step at a time. The real question is: are we willing to step up to the plate and do it anyway. That will sort out the wannabe’s from those that can deliver.

Do you agree? Have I got it wrong? Tell me in the comments and let’s start to make a difference.

Image Credit: Old Broken TV by schmilblick on Flickr. Creative Commons Usage.