Are Silicon Valley VCs killing innovation?

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VC's and Innovation

The title of your blog suggests that VC's are in control of innovation - a position that is correct only if entrepreneurs grant them that power.

I am no fan of VC money (I get along with some VC's personally) because it is so expensive and the need for a cash exit often distorts business models and market timing. However, VC's are not into innovation inventory management, but into generating a rate of return for their investors. Under current market conditions, they gain nothing by putting money at risk that will be paid back at a much later time at a lower rate of return.

However, it bothers me when I hear entrepreneurs blaming VC's. Entrepreneurs often design their business as a product in the early stage of a life cycle that requires that it be handed off via IPO or acquisition to someone else. There is no expectation of staying with the business for the long term, because the entrepreneur wants to package the business up for sale rather than focus on serving their markets. This approach to running a new business puts the VC's in charge.

If the entrepreneur restructures their business to cash flow to investors over time as does a partnership or limited liability company, then a cash exit exists if the company succeeeds in entering the market and holding a market share. There is no 'exit' as an event that may be an artifical success point.

Also, if entrepreneurs don't like the price that VC's charge, then they have the option of going directly to the investors in the VC funds and cutting the VC's out of the middle. That is what I am doing. I am working on a seed capital fund for Colorado: 2009 Colorado Seed Capital Fund. We plan to conduct a direct to public offering and obtain money into the fund from the same people that the VC's do.

Unlike VC's, we plan to offer a revenue share (royalty) structure so that investors are paid back out of cash flow and not out of profits. This creates an earlier stream of pay back to the investors and better aligns the pay back with the performance of the business.

I encourage any entrepreneur who is unhappy with the current economic situation and the price of VC money to go do the same. Complaining doesn't cut it.

Karl Dakin
www.seedcapitalfunds.com

Posted by: KDakin   Posted on: 08/12/09 You are currently: a Guest | Members login | Terms of Use

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