Is it just me or does everyone want to be a Venture Capitalist these days? I've been re-reading my latest LinkedIn "cold call" note that looked incredibly similar to a few dozen others I've received over the past few months:
"Hi Victoria -- I am seeking investors to start an investment fund. This fund will invest in startups and small businesses in a broad range of industries. If you are interested, please let me know."
These notes are arriving from the U.S., India, Russia and even Africa. I have no idea why I am on their list, nor why I am enthusiastically pitched by strangers at business events "off-line" -- before I even have a chance to disclose the fact that I am not a Russian oil tycoon. But I do know one thing -- it is tough to be on the "selling-side".
A friend of mine has been pitching his new venture unsuccessfully for over a year and ultimately grew a beard and gained weigh, just like Albert Gore did after losing the Presidential election. We, his friends who happen to be in the entrepreneurial and investment ECOSYSTEMS (excuse my French) all tried to help but at some point we had no bullets left (read: investment leads). So, I've decided to bring some enjoyment into his miserable existence and recently suggested that he should make and wear a t-shirt with some cool slogan, like the one I used as the title of this blog post or something even stronger, like:
"I am raising capital for my venture. Can I show you my Deck?" (Yes, I meant Pitch Deck -- and what did you think?) OK, scratch the last one but seriously, can we ease the pain?
The results of recent Kaufman Foundation research stated that the VC industry has delivered poor results for over a decade. In fact, the returns from the public markets were practically similar to VC returns, and what is more, since 1997 less cash has been returned to investors than has been invested in VC. Of course, Groupon, Zynga or LinkedIn continue to inspire the "too-big-to-fail" minds, but the truth is that only 20 percent of VC funds outperformed public markets by more than three percent; and half of such VCs started to invest in mid 90s.
Still, the human working population it seems is divided by two -- those who are VCs and those who are not VCs (but would like to be even if they do not say so). The logic? Well, besides the fact that it is obviously sexy to be called part of the "Dragon's Den," "Shark Tank" or any similar epitome that our pop-culture fed us with, the infamous "2 and 20" formula (2 percent management fee on capital committed and 20 percent profit-sharing arrangement) always works. It's just simple math: if, let's say you have $10 million under management and don't produce any returns, you still are entitled to 2 percent of the management fee which is $200,000. And to the astonishing findings of the Kaufman folks, the average VC fund in the United States actually FAILS to return investor capital after fees.
There are a lot of talks and discussions lately about how to fix the broken VC (LP) investment model and it is my only hope that soon we all will witness an increased transparency and, very importantly -- a sensible alignment between VCs and entrepreneurs in a $15-20 billion (annually) VC fundraising industry.
Until then, before you starting to talk to a VC, make sure you know what the rules of the game are. Unless you are building a $30m + business, don't bother with VCs. If Friends & Family do not return your calls any more, angel investors might be an option. Remember that these days, angel investors most often invest at pre-money valuations between $1m and $2 m with an IRR projected 10-20 percent (VCs are looking for at least 20-40 percent and more).
But most importantly ask yourself who is my buyer and why is he/she going to pay for my product/services? The aspiration of searching for investors is important, but I've found that sometimes it can be disruptive to a steady search for customers.