Sandhill Group (MR) asked me to contribute a blog on the continued relevance of VCs, whether they have changed etc. I have cut and pasted it below.
My views on VCs are in line with market opportunities. Plenty abound in spite of market talk of "consolidation" and adventuresome and articulate VCs are what the industry needs to lead us there...
"I did not always agree with George Shaheen when he ran Andersen Consulting (now Accenture) and I was a Gartner analyst. But he made a speech years ago I still remember. He said he wanted Andersen to become like Bechtel. He wanted metaphorically to go to remote places in the Brazilian Amazon and build cities – in his case "digital cities". While Greenpeace may disagree with the logic of doing so, it left me with a romantic notion of what tech leaders do. Dreaming big dreams.
To me that is what Valentine and Doerr and Khosla have done in so many market segments. We need more of them, not less. As I have written before all this talk of market consolidation is premature – if we just follow GE around the world (places like Tataouine - Luke Skywalker's home world and the town in Tunisia) there are hundreds of new opportunities - see my blog on this here.
Having said that as here are 6 tactical areas I think VCs can do better:
a) Provide more industry leadership. With all the talk about "IT doesn't matter",
we need more industry salespeople to talk to CEOs and other business
execs about the magic of technology. A few like Ray Lane of Kleiner do
so. Most VCs seem to mingle with each other and other financial types.
b) "Customer revenue is mother's milk, VC money is sugared water". – it's ok to diss yourself to entrepreneurs. Keep them focused on customer and revenue. Bringing a wider buyer rolodex – a) above again helps – is one of the best things you bring to your entrepreneur. Hate to put is this way – but the capital you bring is just fuel. Important, but undifferentiated.
c) Tough-love is even more important. In the start up I founded we got too much money in the first round, way too little in my second. We should have shut down when the second round we raised was 40% of what we needed because the capital markets had turned in the summer of 2000. Instead we ploughed on when we should have been slapped to our senses. Now I know - but we entrepreneurs have one or two or three data points – VCs have hundreds.
d) Markets evolve – so could your thinking. I am constantly amazed US VCs still think services are bad investments – they cannot scale, margins are poor etc. Have you seen Cognizant's performance – revenue growth in excess of 50%, gross margins of 45%, valuation of 10X revenues? Ditto for Wipro, Infosys and others. They are just different manifestations of software.
e) Do not uproot entrepreneurs unless absolutely necessary. See my blog titled "Californication" here.
f) Rethink comp models – much more fresh management blood would move in to start-ups if we re-thought the cash poor/equity rich model. Yes. folks like George Shaheen.
The cynics say "but look what George did after Andersen with Webvan". I would like to think VCs can instead relate to the scene in "Indiana Jones and the Last Crusade" where the collector known in the credits as ″Panama Hat″ tells Indy, ″You lost today, kid. But that doesn't mean you have to like it.″ And in a show of admiration for the kid's spunk and courage, takes off his hat and places it on Indy's head."