Archive for the ‘Venture Capital’ Category

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.