How to reform the VC industry

There’s a wisp of a discussion materializing in the tech blogosphere about reforming the VC industry. I have been thinking about this for many many years. It’s an exciting time because I think it might actually happen now. Here’s the rough outline of my plan to reshape the VC industry around the philosophy of the web.

1. One word: disintermediate. Take out the middleman. We don’t need the partners, limited or general, they gum up the works. We need money to start new ventures. Luckily we know the people with the money, they’re the users. And we need people to validate the ideas. Same people, the users.

2. It’s not actually a new idea. That’s how Netscape and the dotcommers that followed went through the roof of the stock market. People who traded could see the raw power of the Internet and knew, one way or the other, that this was going to change how everything was done, from business to romance, travel, gambling, everything. So the users of the Internet bid the stock of the Internet up. And up. And up. And so on.

3. So what did the middlemen do exactly? They invested in all kinds of idiotic things. Anyone could have made the bets they did. The users hadn’t had time to fully absorb the Internet in the 1990s so they bought all the garbage the middlemen shipped, leading to online pet food companies with market caps exceeding the largest industrial companies.

4. So now we’re in the middle of the next decade, and the users are caught up, and we’ve got a pipeline going, from entrepreneur to user, and maybe not much inbetween. Matt Mullenweg hasn’t taken on any VC to start wordpress.com. Who knows how far he can go without having to sell stock? I don’t want to say how he’s paying the bills, I’ll leave that up to Matt, but suffice it to say it’s honest, sustainable, and legal.

5. In any case, I’m sure there will be startups that need capital. Let’s assume so. So let’s start a new company, with Rick Segal as the CEO (if he’ll do it) called User Internet Capital Corp or something catchier. File all the right paper with the SEC, and do an IPO. You have to, because we’re going to be selling shares to the public right at the start. This thing will be public from day one. The purpose of the company will be to invest in promising young Internet companies, chosen by the users, nurture them through startup, get them liquid through acquisition or IPO and distribute dividends to the shareholders accordingly. Retain some cash for overhead and (I insist on this) a small percentage for pure technology research and development, so there will be new ideas to base the startups of 2009 and 2011 on.

That’s it. Never stop investing. All you have to do is listen to the users, who also happen to be the owners. How about that?

Postscript #1

About the “I insist on this” part — of course that’s negotiable. I wanted to get that in there initially so it would be discussed.

It came from a chance meeting on the street with John Doerr shortly after the dotcom bust. I said to him, next time, make sure you have some new ideas in development while you’re riding the wave, to avoid this boom-bust cycle, or at least to cushion the fall and shorten the downtime.

So I’m not talking about the individual projects, I’m talking about big ideas. Imho, money should have been funneled to TBL’s project in the early 90s, who knows how much further the web might have gotten in its early stages if there had been some money around then. I can tell you for sure that RSS could have used some resources while it was in gestation, while Doerr & Co were feasting on the meal that TBL prepared for them. I don’t have to imagine how much further along we’d be now, I know.

Also some of the money should be earmarked for funding open source projects. Another mistake made by Doerr was not flowing some of their return into the underpinnings they’re building on. Watching Podshow recruit engineers now (from a distance of course) I can see how a few bucks from KP a few years ago would have left them a lot closer to realizing their potential now (or not). Now they have to reinvent a lot of wheels because open source projects are largely understaffed.

So I’m proposing to practice what I preach. It’s like leaving some money on the table after you eat a meal, as a gratuity for service. If we’re going to return a dividend to the shareholders (we’d better or its not worth it) we should also support the people and ideas that brought us here, and invest in our future.

Hopefully that clears it up a bit.

Postscript #2

Mark Evans writes: “So who are these people and what makes them more insightful than VCs?”

That’s a very fair question, and I’m sorry that wasn’t clear, I did just kind of gloss over the idea, but it’s very important, so I’ll elaborate.

The users validate the ideas. I’m sure the prices of Flickr and de.licio.us were a function of how many users they have. They call it user generated content, and it’s what drives market cap of acquisitions these days.

So, while there would need to be some kind of an investment committee that decides where to allocate seed capital to get initial ideas going, from there, it’s the number of users, the need for scale that drives the flow of money.

If a Flickr needs more servers, or wants to hire some programmers to create some new functionality, they get the money (and we get equity of course) as determined by the number of users and the rate of growth, and somehow related to how valuable the users are. We can afford to be crass about it, because we are the users.

43 responses to this post.

  1. There has to be some by-law that says no owner can hold more than 1%, otherwise Carl Icahn comes along and gets control and the name User takes on a different meaning.

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  2. Kevin Burton @ Tailrank.com has been running a “server fund” – If this type of model could be institutionalised post Enron and Goog click fraud, there would be alot of visionaries with energy that could become businessmen. This model would seem very well suited for “angel” investing ($50K-$3M) rather than VC ($3m-$30M) Businesses will still once they hit years 2-5 need ‘expansionary’ capital to go global/IPO etc anyway. It’s a great idea, as to be an angel investor, you need to be a “high net worth individual” and thus if someone has $100/$1000/$10,000 they end up investing it in the casino/stock market/annuity/warren buffett/etc when they could align their investments with their ‘world view’. Obviously there would also need to be an ‘exchange’ or market for the shares (as suggested with the IPO) and that also is a classic problem with entrepreneurial/VC exchanges (they tried to set some up in australia a while back as we have no organised angel tech investment here) I like the twist though of making mom+pop shareholders in the next new new thing, not suckers. And google shouldnt be the only one to benefit from a dutch reverse auction !

    Reply

  3. 12/12/05: “I want to be an owner!”

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  4. […] I just read Dave Winer’s essay on the future of the venture capital industry. […]

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  5. […] Scoble riffs on Dave Winer’s wishes for the venture capital industry with The “ventures? we need…. It’s a top 10 (OK, 11) list, but #7 reaches too far. 7) Venture ideas. I’ve hung around the industry now to realize that there are a few people who generate far better and far more ideas than anyone else. Microsoft has one of those guys. His name is Eric Horvitz. He owns the most patents at Microsoft and I believe he has about twice the number of the person who is in the #2 spot. Now, you probably couldn’t afford him full time (I’m sure that other multi-billion-dollar companies even regularly bid against us for his time) but you might be able to, say, rent Dave Winer or Steve Wozniak or, even, Matt Mullenweg, to come out and give you some ideas for a day. So, “venture IG’s? (Idea Generators) will be sought after. […]

    Reply

  6. Take this one step further

    instead of the bankers making all the money off the users, include the charities.

    I was at a diabetes fundraiser tonight in Phoenix that raised $2 million from the fantastic, generous crowd. How about take 25 percent of that and take a shot on the user picked group of promising picked internet companies so that the next google of the world’s profits go to great causes directly.

    Reply

  7. […] Dave Winer wrote a post today called “How to Reform the VC Industry” Robert Scoble follows up with his own thoughts. […]

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  8. Dave,

    Did you see my Angels via Adsense idea?

    Basically you create a VC fund from extra traffic. A lot of people/bloggers have page views they’re not monetizing. You take all the extra money and throw it into a fund… then you let the bloggers vote based on the amount of money tney contribute to the fund based on their adsense.

    Entrepreneurs would then pitch the fund and the best idea would get the money.

    No stock could be involved though because of legal issues…

    but this is good for the startups because they just want to build the company not give any of it away.

    Reply

  9. Dave, you’re on the nail with the word “disintermediation”. I also think you’re right that the time may be ripe for this kind of change (a lot of us have been thinking about this for many many years ;-). Ok, right now the majority of the Web 2.0-style startups are following the bubble pattern. But the availability of open source and the use of the Web as Platform mean that many traditional paths can be short-circuited. This is beginning to disrupt the entire space.

    Your “User Internet Capital Corp” approach certainly sounds feasible. I expect a lot of other new business models will emerge. It’s not only going to impact startups, but companies with traditional models too will need to restructure to survive. Interesting times.

    Something worth bearing in mind is that one result of the ongoing changes is that startups don’t need a fraction of the money they once did (why write new software/services from scratch when you can glue existing components together?). So there’s considerably less dependency on VCs in the first place! Disintermediation++

    Reply

  10. Posted by Stewart on January 29, 2006 at 3:53 am

    The first “co-operative society” was founded in Rochdale Lancashire in 1846, they now run Britain’s 10th largest bank, a rather large retail concern and one of europe’s biggest insurance companies. All customers and employees are members, and profit’s are shared in an equitable manner. It’s run democratically and ethically.

    Reply

  11. […] I can’t wait to have an opportunity to pitch to the new generation of VCs as Dave Winer and Robert Scoble define them. […]

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  12. Posted by ZF on January 29, 2006 at 6:14 am

    I was with you right up to the “I insist on this” which runs, it seems to me, counter to your whole argument. If 1% is to be diverted to the “vanity projects” of individuals such as yourself then that will most surely subsequently become 2%… 3%, etc. over time, as well as a source of endless conflict over its allocation.

    Focus is what could make this successful. A 1% diversion of funds could never have an impact on technology availability (we are swimming in new technology already). The diversion of effort and clarity it would cause OTOH could easily prove disastrous.

    Reply

  13. Mark Evans: “So who are these people and what makes them more insightful than VCs?”

    I’m sorry that wasn’t clear, I did just kind of gloss over the idea, but it’s very important, so I’ll elaborate.

    What drives market cap these days? I’m sure the prices of Flickr and de.licio.us were a function of how many users they have.

    So, while there would need to be some kind of an investment committee that decides where to allocate seed capital to get initial ideas going, from there, it’s the number of users, the need for scale that drives the flow of money.

    If a Flickr needs more servers, or wants to hire some programmers to create some new functionality, they get the money (and we get equity of course) as determined by the number of users and the rate of growth, and somehow related to how valuable the users are. We can afford to be crass about it, because we are the users.

    Reply

  14. Disruptive Capital – or how to make funding better

    From an entrepreneur’s perspective, more often than not we need the baggage attached to a capital investment, be it seed or vc…. have the contacts to grow the business (even if those contacts are not directly in the area of interest; more often tha…

    Reply

  15. Brad DeGraf has had a non-profit VC fund – called the Media Venture Collective for some time now. They fund independent media efforts, as well as the Archive.org’s ‘Bookmobile’ project.

    All money contirbuted to the fund is a write off.

    My myself – I’d love ot see Rick Segal take the job – but I’m afraid he may be too ‘Canadian”. Well – we’ll see.

    Reply

  16. […] Dave Winer has an interesting proposal on how to change the VC world. […]

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  17. Dave as usual you stirr the creative juices… nice work. To me what really is happening is that old school job security and old school development are gone. What we’re really taking about here is tranforming ad hoc R&D (piece meal development from individuals) to a formal organization that has funding and a reward system for the producers (in this case product hits the market and has finanical success).

    To me its about encouraging AND financing development. Its the new world R&D model. What’s different is the diversity, speed, and velocity of how it develops. Rapid R&D.

    Reply

  18. […] Dave’s WordPress Blog » How to reform the VC industry (tags: vc internet business) […]

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  19. > What we’re really taking about here is tranforming ad hoc R&D (piece meal development from individuals)

    Is it?

    Reply

  20. So when you say users decide which companies get funded – does that mean that a startup with larger user base is more likely to get funded compared to startup with a smaller user base? Should it based on user base, or number of paying users? And how do we compare numbers for two startups in different domains? My worry is that such a process is too democratic. Are users really capable of making the right choices for themselves – especially when it comes to evaluating management teams, understanding business plans et al – all the stuff that VCs are supposed to be trained to do well?

    Reply

  21. […] Dave Winer, an inventor of blogging, writes on “How to reform the VC industry”. He shows the outline of his plan how to reshape the VC industry. […]

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  22. Some responses at Disrupting Venture Capital with UDDT and Betting on the Volcano.

    BTW, Dave, I’ve been having trouble finding where you first said “users and developers, diggin’ together”. Might have been verbal. I don’t know. But I’d love to be able to point back to your earliest or best instance of it (or of the point you make with it).

    More thoughts in The new invention/investment ecosystem.

    Reply

  23. […] Dave Winer posted a well written note on “How to reform the VC industry” and it really brings out the important elements of how companies can be built by truly funding the development by its users, its customers. Its the single most important validation of the concept/idea/service – if the users adopt it, it really doesn’t matter what an investor feels about it. Not to disrespect the investors’ intellect, but the customers are the ultimate test and if a company passes that test, then there’s no stopping. […]

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  24. […] There’s a lot of talk about rebooting or changing the way venture capitalism works. I wonder is all this renewed talk down to this guy? […]

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  25. […] Fast forward to today. This concept came back when I was reading a recent thread on memeorandum about reforming the venture capitalism industry. Dave Winer started the whole thing, arguing that VCs were no longer needed. That a company could be funded by its users. I like this idea. I have virtually no personal experience in the VC world, almost have a positive image of them when reading guys like Fred Wilson or Jeff Clavier but too many times have i read stories of burnt entrepreneurs…It certainly means that, in general, this business lacks affectio societatis and Dave, by proposing a fund made up of users, that would fund companies in a democratic fashion is touching on something very important. […]

    Reply

  26. Venture capitalists have assumed the role that monarchs used to take. Explorations in the Middle Ages were financed by kings and queens of empires searching for new wealth. All the VCs I know act like royalty, and almost all of them are men and they give money to men. Even though one can cite many incidences where their investments produce enormous wealth, one wonders how many original inventors and entrepreneurs — many of them women — have been overlooked and left to atrophy because they weren’t considered good investments.

    Reply

  27. […] Dave Winer wrote about the need for reform in the venture capital industry – while neglecting to mention Paul Graham and Y Combinator. […]

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  28. Maybe the consumer Co-op is a better foundation than the stock market’s “gambling” model?

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  29. I think this is a very exciting and interesting idea. One thing that’s important to understand is that in order to sell shares in a company to the general public (not just high-net-worths) you have to file regularly with the SEC, both at the time of the issuance of the stock, and then quarterly after that. The number of documents you have to file is substantial, as you can see if you look up any public company in the SEC’s EDGAR database.

    For public companies, of course, this is not a big deal because they have teams of lawyers available to handle it, who indeed live for nothing else. For a ten-person Web 2.0 start-up, it’s expensive, both in lawyer time and also executive bandwidth. This is why all start-ups at the current time go after either VC or high-net-worth money, because the only people you have to be accountable to are the ones who you strike the deal with.

    So an important component of this new VC model would have to be a lowering of the costs of filing and reporting. I believe that could be done, but it would be a non-trivial expense in both time and software development.

    – chris

    Reply

  30. Dave, why don’t you cut out the middleman completely? You don’t need any VCs.

    The users fund the company by pre-paying for services/products–they don’t need an ownership stake–they benefit by knowing that they are helping the startup help them.

    Expertise can be brought in by hiring experts, and Angels can provide a small amount of capital, if neded. These days you just need enough to cover a few salaries you don’t need to build any infrastructure. It’s a knowledge capital world where first mover (containing the top movers) advantage, now, truley exists.

    Reply

  31. […] Dave Winer has an interesting post on “How to reform the VC industry“. I particularly liked the following view point: […]

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  32. […] If you’d like to read about how the VC industry is changing, and a thoughtful examination of what the industry is doing to react to those changes, read this. If you like authoratively written diarrhea, are one of those people that watches late night tv and orders abdominal step crunching machines and wants to reform-the-vc-industry-in-five-easy-steps, read this. Easy steps people, easy. Like 1-2-3-err-5!   […]

    Reply

  33. […] Over the weekend, a discussion blossomed(thanks to Dave Winer) about the future of Venture Capital. Then everybody else jumped on board.  Scoble, Doc, Ensight, CrunchNotes and Nolan just to name a few. […]

    Reply

  34. […] That thumping you hear is venture capital getting hammered into new shapes by Rick Segal, Dave Winer, and others. […]

    Reply

  35. Buy-side co-operatives exist to leverage buyer power to drive down producer prices.

    Sell-side exist to leverage marketing muscle, drive up prices and secure surplus production.

    But an investment co-operative? Where’s the value-flow? Is it a clsoed system, or are you funding it through capitalising sales to non-users??

    Reply

  36. […] This debate is picking up steam, after a post by David Winer,  below is what he said, but there are many interesting reactions. From Mitch Ratcliffe, and others. some of whom have proposals to patch up a broken venture capital industry, which performed very badly leading up to the dotcom crash of 2001. […]

    Reply

  37. Posted by CardCat on February 2, 2006 at 7:31 am

    Dave – I have been kicking around a similar idea for a while now. Someone turned me on to this link. Why couldn’t it work? Sure, the details have to be hammered out, but I think instead of letting John Doe spend $20 a week on lottery tickets, let’s get him to put that money into a VC fund and find the next Google.

    Reply

  38. Thanks Dave for the “Smart Mob” take on the VC world. I’ve always thought there is a better way of finding and then funding worthwhile startups and this would have the added benefit of delocalizing the potential companies. Hell, even the many worthwhile Toronto companies might end up benefiting from this kind of process. Still, we need good managers as well as investors.

    Reply

  39. […] In January, Rick Segal wrote a provocative post that acknowledged some issues in VC land. He followed up with a little more clarification, and a focus on the software and web services space. His posts triggered a flare up of discussion, notably here, here and here. It’s been stuck in my brain ever since. Umair Haque, as always, has some fascinating thoughts on the subject, particularly as it relates to media. He makes a bold statement: But let me be more honest than I perhaps should be: from my POV, as a strategy consultant at the intersection of exactly those spaces VCs are grappling with, the current state of VC is a full-on stall. […]

    Reply

  40. […] Dave has a great writeup on reforming the VC industry (at least in consumer internet segment). Looks pretty 2.0ish to me — but perhaps the first 2.0 idea that makes sense […]

    Reply

  41. […] Dave Winer offers his suggestions for reforming the VC industry. Mathew Ingram disagrees with Dave and says “venture capital didn’t create the bubble.” Other opinions from the bloke-o-sphere can be found here, here, here and… oh, why don’t you just go look on tech.memeorandum for the latest. […]

    Reply

  42. […] That thumping you hear is venture capital getting hammered into new shapes by Rick Segal, Dave Winer, and others. […]

    Reply

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