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Friday, October 05, 2007


Warren Buffett

Well he was right about the series of 'tubes' - I am thinkin gof creating my own BuffetTube !

David S. Rose

Paul is right on target, your own analysis of the problem is quite good, and it would be great if your vision were realized tomorrow.

Unfortunately, the reason that VCs (and angels) are so poor at picking winners is PRECISELY because of the underlying problem: there simply is no way to predict which seed stage deal is going to make it! It doesn't matter if you're John Doerr, Josh Kopelman, Paul Graham, Ron Conway, or me...everyone's batting average is below every ballplayer in the country. That's the nature of the beast.

In the past couple of years I've seen several attempts at coming up with automated risk/quality assessment tools for startups, and despite all kinds of claims, NONE of them work (and to the extent they do, they're based on models like ([successful serial entrepreneur] + [exploding market] + [unfair competitive advantage] + [full management team] + [entrepreneur skin in the game] + [smart, patient money] + [no unanticipated major technological or market change] + [a honking, ENORMOUS amount of luck] = [as good a chance of success as you may be able to find].)

On the transparency, standardization, open market end of the world, however, there is definite improvement. These days, most major VC and angel deals have standardized on Series A Convertible Preferred rounds, based on a standard, freely available set of documents developed by the National Venture Capital Association.

On the angel funding side (where in '05, for example, more money was invested than from all VCs put together), things are getting even more interesting, now that a substantial majority of angel groups around the world are all using the common Angelsoft platform, with a standardized application process and the ability to share and collaborate on deals in progress.

Meanwhile, the major stock exchanges and large brokerages are moving down-market, with 'feeder markets' designed to trade private companies among institutional investors. It is only a matter of time before this extends even lower into the food chain.

But anyway we look at it, the tech startup AND the financing worlds are in the throes of a major upheaval, and it will be fascinating to see how this evolves over the next decade.

[Note: Angelsoft is one of my portfolio companies]

OK, so what about the companies VC's USED to finance that don't just materialize from a couple of programmers, some servers and some bandwidth?

We have a startup that requires $20m in capital, and of that, $18m is hard assets like real estate and construction, all tied together with a new kind of asset management software.

The hard assets have a fixed cost, and real value after their purchase (unlike the 5-6 failed software startups who have nothing when their "critical mass" fails to materialize, we actually have some very expensive stuff the investors can sell of to recoup some of their money).

But this isn't the game VC's want to play either... but maybe they'll be forced to sooner or later if the "two guys in their garage with their credit cards" by and large gives them nowhere to put their limited partners $$$?


Imagine if we could just upload an OPML of defined financial and activity metrics and have it kick back a valuation within 10% based on industry best practices. Now THAT would be nice. You just have to get the market to honor the valuations. And be able to sum up the competitive market place with one or two numbers. And integrate branding and leadership team strength. And have a metric for cultural factors. Multilingual? And, and, and…

Yes an efficient transparent market would rock. And I have definitely had more than my share of arguments with bankers (we are privately funded and profitable). Banks simply don't loan against proprietary technology they don't understand. Trucks? Yes. Software? Not so much.

What is missing from your post is HOW we get to a transparent market. Leaving this coyly to the reader is a wishful cry for a theoretical alternative to the Faustian VC relationships.

Don't get me wrong. I'll keep refreshing the post in hopes. But if you HAVE an answer to create a transparent market for early stage tech beyond hope, oh please do share it with your readers.

Peter Nixey

Love the article Dave (and you hardly mentioned Facebook at all - well done).

I love the concept too though don't you think that if companies and ergo ideas were able accurately priced then they could spawn and grow inside a metrics-driven corporate.

Innovation investment is hard to defend in such an environment because of its dependency on raw "belief" but if it were tangible and price-able then it would tend towards going/staying in-house?

I don't think we will ever be able to price early stage companies and ideas accurately (and surely the outcome would be a new, low-overhead stock exchange if we could) but it's interesting to think about.


Oh, you are so-o-o right Dave. I have seen VCs throw out the visionary, cram down the management team, and close down companies for reasons that had nothing to do with the company's performance, but only that of the VC's portfolio.

I have also PERSONALLY both invested in and lent to startups, and I am here to tell you that while I have rooms full of stock certificates that are worthless, I've been paid back every time but once. An alternative LENDING source for entrepreneurs makes much more sense.

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