The Venture Edge

Lately, private equity has gotten a lot more attention than it probably wants.  That’s because most of the attention has been negative as reporters and political pundits have gone all out to expose their lack of knowledge on the subject including confusing venture capital with private equity and making wildly unsubstantiated claims about the “vulture” nature of private equity.

It’s very hard to get the business model right at startup. Even if you’ve done all the things we’ve talked about in previous posts, there are no guarantees that things won’t change once you have an operating business. The business environment is fluid (and that’s being kind) so chances are you’ll be operating a few months and something will shift

This week I had the pleasure of meeting and talking with Scott Lenet, co-founder and managing partner of DFJFrontier, an early-stage venture capital fund with offices in Los Angeles, Portland OR, Sacramento, and Santa Barbara.  To be quite honest, until now I did not have a very favorable impression of venture capitalists--hence the term vulture capitalist, which is often applied to disparage them.  Venture capital funds are professionally managed investment funds that typically invest in companies at the rapid growth stage or just prior to an IPO (initial public offering) or M&A (merger or acquisition).  If you've ever been in a room with a bunch of venture capitalists, you know that the arrogance is palpable.  And you've no doubt heard the horror stories of the nasty VCs who wanted to steal a company from its hard-working entrepreneur.  In some cases, the stories are true...but not always.

At least two to three times a week I hear from an entrepreneur seeking money to start or grow their business. Usually they need the money yesterday.  Sometimes the request comes from people I know, but, more often than not, I've never heard of the person or they've found me through six degrees of separation on Linked In.  Believe me, cold calling people who know nothing about you or your business is not an effective strategy for raising money.  How to search for money will be the subject of my next post, but today I want to focus on whether you're even ready for investor money.

Peter reported on a very upbeat VC study in his his last post.  I'm not disagreeing with the study, but I'm not sure I'm ready to declare anything close to robust investment activity.  The reason I'm skeptical is that the most recent MoneyTree Report from PricewaterhouseCoopers LLP and the National Venture Capital Association (July 21, 2009) is claiming that although there's an "overall increase in investment levels...," the number of deals has remained flat at 1996/1997 levels. 

There is a huge cultural change going on all around us--you would have to be in a coma not to see the evidence--and it has ramifications for innovation on a global scale that we don't yet understand.  I'm talking about the cultural shift to short-term thinking and instant gratification.  We see it in every facet of life, from short selling in the stock market, to investors opting out of really early-stage ventures because the time to exit is too long, to students leaving PhD programs in science and engineering for lucrative business jobs right out of college, to communication tools like Twitter.  We want what we want right now--we have no patience for long-term thinking.

I am a huge fan of Warren Buffett's investment philosophy because I think it applies not only to investments in stocks, bonds, and other cash equivalents but to entrepreneurs as well.  Today I was reading Buffett's letter to the shareholders of his enormously successful company Berkshire Hathaway Inc.  Now, believe me, with the exception of a notable few, I don't spend my time reading annual reports because most are pretty boring.  But I always find that I learn something new when I read Buffett's annual letters to the shareholders, and they can be quite entertaining as well.