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Is venture investing a gut business ? June 30, 2006

Posted by rajAT in entrepreneur, startup, technology, vc, venture capital.
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Yes, it is.

Paul Kedrosky a venture partner with Ventures West, who also writes a famous blog Infectious Greed, was moderating a VC panel where the same question was being debated – Is venture investing a gut business. And the conclusion is, that it is.

One of the main reasons is that after 4 decades of active investments the VC industry still doesnt have a formula for zeroing down on a winning company.

If you go to any conference where a VC is addressing the crowd. They will all state this statment religiously – We want “A” teams. An “A” team can save a mediocre technology, but a “B” or “C” team could screw up even the best technology. This statement is as hollow as Rakhi Savant kissing claims. In first place how you will conclude that a particular technology is mediocre or killer. In hindsight, one can always make big statments.

When the legendary VC John Doerr came down to Banglore. We asked a question to him when he repeated the same, “A” team – “B” technology statement. The questin was with a twist – Google didn’t have a management team or an “A” team when you guys invested in Google. To hell with management team they didn’t even have a plan how they are going to monetize this whole thing. Then what made you invest. John didnt offer any counter argument – infact he said Google is an outlier so its kind of pointless debating or discussing it. That really helped. Finally, he said we invested because Ram Shriram has invested. Talk about herds.

My 2 cents on it –
For a second if we look a little closer at the ideas or technology. They fall under two categories  – 
 1) Technologies that change the world. 
 2) Technologies that make things which are already present better, faster or bigger.

The ideas that fall under second category, for them the business models are already proven the entrepreneurs are trying to improve the user experience. These ventures don’t create new markets but may expand existing markets. For example – the travelling industry was always there but by taking it online, booking tickets become so easy.

The first category is the difficult one. When Apple computer started who had thought that the whole PC industry will get so big. But Steve Jobs and Steve Woz thought differently. When Google came up with their search technology noone thought that online searching will be an annual $10 Billion in revenues business. The ideas that fall under this category lead to the creation of a whole new industry.

Hence the difficult part is that there is no factual data that can prove that this new stuff will work. Anyone who is trying to prove this nothing but a fool. For such things one can only go from year to year or better quarter to quarter but you cannt have a 3 year Capex plan in place. It is just not possible. Who has dreamed that iPod will be such a hit, I doubt even Steve Jobs has dreamt that iPod will be such a killer. (iPod led to the creation of microcontent, MP3 players were always there).

The panel concluded finally that picking such trends is an art and not a science. Either you have it in you or not. No business guru or a professional service can help you in taking the decision. Only your gut can show you the way.

In the end, Spreadsheet jockeys are not needed but Dreamers. 😀

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Comments»

1. Prashant - July 4, 2006

it is gutt business of course . I would like to point our one more and rather disturbing characterstic of it . this is a business plaued by biases & Lobby .

Enterprenurial People believ that its undelying technology is only thing you need but after watching a lot of failed business i can say that technology is not that important many best technology doesen’t get funded so they can’t see light of the day . in silicon valley they have something of a tradition called Keritsuu where VC develop a eco system of companies they invest and each company help each other irrespective of inherent technological merit or long term wealth creation potential . druggstore.com & Amazoan.com is one of many example .
closer to home there was a company in IIT Mumbai called ” E Infinitus ” perhapse one of the most disruptive company from IIT . when they pitch to a big name Sand Hill VC he advised them to not to do it all alone and get their tech licenced to CISCO or Juniper .

one year down the line the company is sold to cisco and i doubt the valuation would be somethng whihch do justification to the potential . but on the other hand CISCO could very easily have crushed the infant if they had tried to act like a “Bull in China Shop”

so all this Disruptive tech stuff is good but as long as you integrate your Disruption with existing ecosys . if you try to do a solo performance than you have to struggel a lot.

as an starting enterprenuer we are sometime overwhelm by “Greatness” of VC and believe that since this guy has spotted o many big companies than if he approve my idea i can achive my goal . there interpretation is looked upon as the fianl judgement on the potential of idea and enterpreneur . folks litreally give secon thought on their calibre once some big VC reject them theVC whom you meet twice for 3 hour and who have 100 & one other intrest than your companies .

we should remember that he might have spotted some big guys when they were infants but some big guys are also big guys just because he have spotted them . hope you will not take their opinion as verdict . 🙂

good luck

2. rajAT - July 4, 2006

That was enlightening Prashant.

Thanks.

3. Puneeth - July 5, 2006

Interesting comment Prashant. All the best for ur venture. Lets see if we can meet up @ Barcamp Hyd2.

4. Vaibhav Domkundwar - india 2.0 - July 10, 2006

Rajat:

Nice post. I think the bottomline is that entreprenuers make a company. Sometimes its that technology, sometimes marketing and sometimes just timing. VCs have a part of play but I think its tough to give them the credit of spotting trends and picking winners. I also agree that this A team stuff applies is some cases but most of the current big successes – Google, Yahoo, Amazon, eBay – were from founders who did not have any history of entreprenuerial success.

Another thing that you come across often in the Valley is the feeling that if someone got funded by a big name VC, they are golden. I wonder where this feeling comes from ..to those it comes. I think a company should be happier about getting their first customer, then their second and so on. Funding should be one of the milestones, if required, and not a reason for celebration or feeling elated. Hundreds of barely-surviving-and-shutdown startups are good examples of this.

In anycase, I hope this new entreprenuerial generation in India focuses on the fundamentals first.

5. rajAT - July 11, 2006

Vaibhav,

Great point. The first thing important for a startup is to get a customer and get some real cash inflows.

In India, I generally have seen people think about monetization before jumping into anything. Thats good or bad.
Bad because this way we cann’t have a Flickr or YouTube coming out of India.

Thanks for comment.


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