Are venture capitalists paying or living the venture?

Techcrunch article ‘VCs are getting into PR’ started ‘my fire’ again. The article highlights the trend that VCs is no longer just about paying checks – well, if it ever was? – and names PR as one function that VCs are now paying attention to.

Obviously, competition for funds and leads as well as the fight for any stakeholder’s recognition of the beauty of a VC is shifting as the lack of cash becomes more critical. PR is just one component in the business architecture, but the point is the increasing awareness in the VC industry that it takes more than just cash to create value and survive.

This is particularly true in the seed arena, I believe, particularly publicly funded seed investors. My experience suggests that seed investors – as opposed to business angels – play their ‘numbers game’ in which they assume that a hit rate of 1-2-5 percent (varies with respect to level of maturity) is satisfactory. The effect of their ‘numbers game’ is that funds are invested in a higher number of portfolio companies – but worse, with a corresponding lack of focus. Further on, this increases the requirement to portfolio companies in terms of the maturity of plans, level of documentation, commercial progress, etc.

It’s a catch 22. Seed companies are, per definition, not that advanced – so in fact, this type of seed investor is in search of a later stage portfolio company. The risk – or rather likeliness – is loss of value, because the seed investors do not possess the company culture it takes to bet on fewer portfolio companies, and to proactively take part in the early stage development – go to market exercises, specific management support, etc. Unfortunately, the seed investor is not just wasting the money he invested, the seed investor is also wasting other people’s time.

The solution. Seed investors should start to focus the bets and … 1) Grow a culture of transition leadership and risk management in which it is okay to fail – if you gave it all you had! 2) Change the investor manager’s / venture manager’s compensation model – less emphasis on an aggregate / portfolio model dominated by the fund’s traditional management fee of funds plus carry model, and higher emphasis on individual project & employee specific performance. 3) Recruit more venture managers, who are closer to the operational mindset as opposed to the financial way of thinking, who are willing to bet their own reputation on being successful.

We see ourselves as ‘living the venture’ as we invest time on a daily/weekly basis and target new portfolio leads on the basis of how we can add value not just on a board level. Most VCs will argue the same, but are the venture (portfolio) companies truly experiencing your value contribution? Are you truly living the venture? Are you truly creating value? Unfortunately, the numbers game suggests you are not.