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The VC-Entrepreneur Compensation Disbalance

Posted on Friday, Sep 28th 2007

We started discussing the leadership development problem in my previous post referring to Prof. Khurana’s new book about Business Schools losing sight of their mission of grooming leaders capable of building and running sustainable enterprises by following the money trail.

So, what’s happening in the Venture Capital / Private Equity world?

The compensation disbalance here is also quite stark. [Here’s a follow-on exhibit.]

VCs without much of an operating background constitute a trigger-happy lot, operating based on spreadsheets rather than experience or intuition. Of course there are exceptions, and VCs like Don Lucas, John Doerr and Mike Moritz have created enormous value, and have effectively helped build the ecosystem as we know it today. Nonetheless, the few rounds of Silicon Valley Gold Rushes have made it possible for opportunists who have also managed to flourish.

As for the compensations, General Partners at Venture Firms make anywhere between $1 Million to $3 Million a year without counting performance incentives. The carry is all upside. PE firms pay a lot more, and it is not unheard of that Partners at PE firms make $50-$100 Million a year. Then of course, there are the Hedge Fund Managers, who are also absurdly heavily compensated, who these days are getting into the late stage venture capital game.

In contrast, the poor entrepreneur bootstraps a startup, takes enormous risks, and if (s)he raises venture money, the first thing a VC does is to restrict his/her salary to a minimum.

It is a well-known fact that Silicon Valley startup CEOs are a dramatically under-paid bunch. For what it takes to do the job – the kind of stress, travel, opportunity cost, failure rates – many savvy entrepreneurs and executives have figured out that it isn’t worth it to be the CEO of a venture funded startup (if you have other options, that is). Being a VP is even worse. Only one out of 50 startups succeed (or may be one out of 100, I don’t know the exact ratio), so the equity component of the compensation package rarely pays off after the liquidation preferences, etc. are settled.

I would go so far as to submit, working for a VC-funded startup is more like having any other job, than true entrepreneurship where you actually are your own boss. Entrepreneurs / CEOs answer to a Board. There is a compensation committee that decides how much you make. You get fired and washed out of your equity stake based on the VC’s whims. This may be perfectly legitimate at times, since not all entrepreneurs scale to become good CEOs of larger companies. But often, these decisions are gut reactions, not legitimate, and entrepreneurs get slaughtered due to the VCs’ lack of experience or seasoned intuition.

Throughout history, it is the entrepreneurs who have built companies and shaped economies, not money managers. It is just plain wrong that we have created a system that compensates these builders at rates that are so much below the money managers.

It is incredibly important for us, as an industry, to solve this problem, and come up with a sustainable business model and incentive structure. Otherwise, talent will continue to be mis-channeled and applied to unworthy causes.

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Vesselyak.Com » The VC-Entrepreneur Compensation Disbalance Friday, September 28, 2007 at 11:52 AM PT

You make some good points, Sramana, but maybe too generalized. I can’t speak to private equity, although I’ve also read about compensation levels in the tens of millions. But I bet you that there are plenty of people making a lot less than that. The same is true of venture capital.

If you do the math on an “average” fund that has about $50M of capital per GP, with a 2.5% management fee (in the early years), that’s $1.25M/year/GP. That fee pays salaries for support staff/analysts/associates/principals/venture partners and others, rent, travel, consulting fees, legal and finance, etc. It doesn’t support a $1-3M salary for the GP. Sure, there are big firms running multiple funds where the math is different.

On the entrepreneur side, sure, startup CEO salaries are low compared to those at large public companies. And the risk is usually higher. The equity upside is much higher. If the company fails, everyone loses all of their money. If it’s a modest success, a well-structured and fair venture deal means that everyone makes some money (although not a lot). If it’s a home run, it’s not unusual for the CEO to make $100M, and that’s real money.

I’ve seen both sides of this game. I won’t argue with the fact that a successful VC can make a lot of money. To me, the biggest difference between VCs and startup CEOs is in the shape of the curve, not in the end points. And portfolio theory is a dominating factor: the startup CEO’s compensation is tied completely to the outcome of one company, usually over a period of 5 or more years. A VC’s compensation is dominated by the home runs in a portfolio of many companies.

Is it fair? Heck, I don’t know. It depends on how much of a company’s value each of the constituents has generated, which is impossible to measure. But, I’ll tell you from my own experiences that, although the CEO is always the point person and ultimately responsible, a strong Board (VC or otherwise) can and will generate a big chunk of the value, too.

Alex Osadzinski Friday, September 28, 2007 at 12:43 PM PT

Hi Alex,

I can always count on you for thoughtful perspectives :-)

I’ll share with you what I think is the problem with the structure, and you tell me what you think.

For the sake of this discussion, let’s put the home run deals aside, since there are so few of those, and an industry cannot be structured around that.

And let’s assume that VC’s make a base of $500k-750k a year without counting performance incentives. Again, leave out the $1-$3 Million number.

Now, look at the CEO’s with plenty of track record, experience, etc. to whom are offered a maximum of $350k a year including bonus in cash, and an equity package that, in the event of a success but not a home run, can yield $3M-$7M.

And, as you point out, this executive is not given the benefit of the portfolio that VCs are able to have, to spread their risks around. They have to bet on one horse.

I don’t think the compensation is very attractive, which is why you are seeing lots of people with substantial talent, experience and skills saying, “No, Thanks.” There are other, easier ways of making that money, especially those that enable a better portfolio balancing, and with a more even spread.

In fact, I would go so far as to argue that these experienced executives who provide “adult supervision” to companies are more like “co-fund managers”, and should be compensated accordingly. VCs, however much “value” they add, they certainly don’t add more value than the CEO, unless we’re talking about Mike Moritz swinging a $100 Million Yahoo deal for the founders of Google. In that case, yes, Moritz added way more value than Eric Schmidt.

But most VCs are not operating at this level.

The case of green / first-time entrepreneurs is different. They have a lot fewer options. The likelihood of failure is higher, and the compensations may reflect some of it, although, frankly, it is my strong opinion, that squeezing people too much does not help them produce their best performance. And making them feel like they are being taken advantage of, breeds bitterness and bad blood, and some VCs forget this purely human emotional element in negotiating deals. It is short sighted and stupid.

Sramana

Sramana Mitra Friday, September 28, 2007 at 1:35 PM PT

Its an interesting separation for professional venture CEOs/ mgmt and the founders of a company. I’m positive that you are discounting the money going to the founders– and overcounting the risk being taken by the venture CEOs brought in– they don’t come on board until the idea’s already well off the ground and ramping up– and if you look at Meg Whitman’s deal terms, their upside is pretty big, especially when you figure their relationships will put them through at least a few cycles before they’re seen as incapable. (and if you believe Marc Andreeson, if you need one, sell the company)

You make the assumption that B-school graduates attracted to financial roles make the best entrepreneurs. In that sense, I think you’ve made the wrong assumption for the founders that really bring an idea to life and are the heart and soul of a young organization.

True entrepreneurship on a societal scale is about highly disruptive innovations that create new markets or disrupt old ones. The people who form these new markets are often driven by curiosity, deep exploration of new knowledge, and a drive to create change. The standard spreadsheet stuff focuses on areas where facts lie– big entrepreneurs need to make visionary assumptions about what the new facts will be. In that sense, by creating new markets with high demand, they will make money as a byproduct of their creation, not because that was the primary objective (financial sector innovation would tend to be somewhat different).

That being said, I would argue that entrepreneurs can argue whatever terms they like– they don’t necessarily need VCs to build businesses, and most new ventures are not VC backed. I think the people investing money in VCs are the ones getting taken if you believe they don’t generate sufficient value for the fees they charge. There is certainly lots of average talent getting premium fees in the hedge industry, and it may be the case in VC as well.

Vijay Goel, M.D. Friday, September 28, 2007 at 2:05 PM PT

True that the final aim of an entrepreuneur maybe to make money but IMHO for an entrepreuneur money is something that needs to be made but not the prime motive. Most startups, atleast in the tech domain are driven by innovations and the desire to create something of your own. If you have a proper business model and a product / service that people actually need, you are not very reliant on the VC since they will be coming to you to fund you (even they need to invest in businesses that make them money they need to give returns to their investors at well esp the PE and hedge funds), there are quite a few examples of companies that went for funding at a very late stage. And as far as compensation goes, ( i am not supporting any one here) it is again a simple issue of who holds the cards, who has more leverage. Lots of startups go in for funding very early, without having adequate experience and grow too fast for their own comfort. So at the end of the day, If i as a VC want to promise 30% returns, i need to invest in high risk business, and if i as a person have the skill to make that 30% return for you I will expect atleast as much for myself. So even though an entrepreuner is putting his sweat and blood, my retuns will be propoertional to the money i put in.
As far as the question of talent going to financial services is concerned, I have to agree, its actually true, but then when you think of it, in all probability since they took the easy way out and choose money, it suggests that what they seek is not to “create” something of their own but to make money. So in a sense, those who were entreperuners at heart will still stick by.
As far as re-engineering the system is concerned, I havent really worked with a VC so my thoughts are based on hearsay so please take it accordingly. I think, even startups have their share of the numbers game. They too are becoming smart at showing spreadsheet numbers to VCs to get funding. What you actually see is a simple case of demand and supply, when there is too much money chasing good businesses there will automatically be some sanity, but when there is too little money being chased by lots of businesses, naturally those with the funds have more discretionary power. So a starting point would be for startups to start being more realistic when making projections and for the ecosystem to find alternative means of financing for good businsses. Like when there was a gap, angel investors filled it, previously it was bank loans and loans from freinds and families..

Sankey Friday, September 28, 2007 at 2:09 PM PT

Vijay,

eBay / Meg Whitman is a home run deal. If you have a home run outcome, everyone makes money. But there have been very few home runs in history, so the industry cannot be structured based on home run outcome assumptions. It has to be structure based on averages.

I don’t, for a moment, make the assumption that B-school graduates attracted to financial roles make the best entrepreneurs. By and large, most certainly in tech, it is the technologists who have been the entrepreneurs, not MBAs. And I made a point in an earlier piece about this.

However, it is telling, that so called “Masters of Business Administration” have no idea how to start or build businesses. And that’s where, I believe, Prof. Khurana’s point is critical. What are they being taught in business schools? And why aren’t they being taught this skillset?

Not all businesses are technology oriented. There are lots of non-tech businesses that non-tech MBAs ought to be able to start. Why aren’t they starting them? Why don’t they know how?

Sramana

Sramana Mitra Friday, September 28, 2007 at 2:16 PM PT

Sankey,

Your point about the primal instinct of wanting to “create” versus wanting to make easy money is very well taken. I agree that perhaps that is the final distinguishing factor of what professions people are drawn to.

However, when you are young and without a lot of real-world perspective, if you soak in a business school environment where the value system that is “hot” and “sexy” is greed and easy money, I would submit, that even if your natural instinct is to build and create, you would most likely get swayed in a different direction.

And if 800 first year MBA students are being offered “career coaching sessions” on how to join private equity, the lure away from creating and building is quite strong.

Sramana

Sramana Mitra Friday, September 28, 2007 at 2:23 PM PT

Sramana, your said: “For the sake of this discussion, let’s put the home run deals aside, since there are so few of those, and an industry cannot be structured around that.”

But, it is.

A lot depends on your definition of a home run, but let’s say that it’s a minimum 10x return. Look at any brand-name “top tier” firm, and examine their portfolio. It’s hard to get exact numbers, but I think that you’ll find that, for the most part, the VCs that you hear about, and that have made a lot of money, have done it with home runs.

In a sense, the only companies that should raise venture capital are those that are shooting for the moon. Although it’s easy to fall into the trap of making a “filler” investment, the truth is that you don’t meet your LPs’ expectations if you invest in a company that you think is relatively safe, but will only return 2-3 times your money.

If, as a VC, you strive to, say, at least return 3x your fund, you should only invest in companies that you think that, at a minimum, could return 6x your money. That’s because, sadly, half the time you or the entpreneurs will be wrong about something crucial, and you’ll return 0x your money, i.e. zilch.

And, I can’t stress enough that a fair deal for the entrepreneur and the VC is vitally important. All of the byzantine deal structure tools that VCs use should be employed primarily to do two things:

  1. If the company has a subscale outcome, the VCs should get their money back before the operating team. And you should absolutely avoid the situation that we’ll all seen when a team exits prematurely because the structure allows them to take a (small) fortune off the table and the VCs don’t even get their money back.

  2. More important, if the outcome is good, the operating team should make a big fortune, as well as the VCs.

Alex Osadzinski Saturday, September 29, 2007 at 12:23 AM PT

It is inline with the general financial industry mentality. Why do employees at Goldman Sachs make 20 times more on the average? What’s their downside & what risks do they take? None. That’s the luxury only money managers have. When they do get into trouble, the fed often works in their favor, appearently to protect the whole economy from sliding into recession. The tax incentives, laws and regulations are designed to protect them and their interests as well. Don’t we all remember attempts to shift the social security funds to the private money managers’ hands recently?

As we have witnessed several times over, with the exception of a few, most money managers / VCs contribute little to the economy or the growth of companies. But its an unwritten rule that they get compensated disproportionately.

How does the system get reengineered? I don’t have many ideas – I am curious what others have.

JC Reddy Saturday, September 29, 2007 at 12:43 AM PT

The numbers make more sense if you look at the risk. A general partner in a VC firm could make $1-3 million/year, but most don’t make nearly that much.

It’s a lot like movie acting where a few lucky people make huge amounts of money, but most actors end up waiting tables.

Wall Street investment banks are also like that. There are some people either at the top or who get lucky that make a huge amount of money, but most people who work in in IB’s make upper middle class “sane” salaries. What happens is that if you happen to be working in an area that makes lots of money, you win the lottery and make huge amounts of money that year. But most people don’t win the lottery and merely make normal high salaries.

There are jobs on Wall Street that increase your chance of making really insane amounts of money, but those are also the same jobs that are likely to get you laid off if there is an economic downturn.

Don’t get me wrong. People in IB’s aren’t starving, but most people aren’t flying to work in helicopters either…….

Twofish Saturday, September 29, 2007 at 4:52 AM PT

The MBA was never designed for entrepreneurs and startups, and with rare exceptions, MBA’s make horrible entrepreneurs. On the other hand, entrepreneurs often make horrible managers once the company has gotten off the ground.

One factor that comes into play here is that there is the cost of education. People pay a lot of money to get an MBA. That cost requires a high return, and high returns require high risk. The other thing that I’ve noted is that people who get MBA’s tend to want to make money as their overriding goal.

If you want to be an entrepreneur, your overriding goal simply cannot be to make money since the reward-risk relationship simply does not make sense. All of the successful entrepreneurs I’ve seen are people who want to change the world or challenge themselves, and the money is only secondary. This usually means that once the business of off the ground, they hand it over to the MBA’s and start something else.

Also, one reason finance people get paid a lot is supply and demand. Startup finance is as crucial as the technology, since nothing matters if you don’t have the money. People who start companies often tend to be strong on technology and weak on finance, and here an MBA might be useful as a go between between the technology person and the finance people.

One thing that I have seen however is that because the technology people tend to underestimate the importance of finance, they often make poor financial decisions (like trying to get VC funding too early). One reason things might be weighted so much in favor of the VC’s is that frankly the CEO’s of the startups are negotiating poor deals for themselves.

Twofish Saturday, September 29, 2007 at 5:08 AM PT

Hi Alex,

Yes, you are right, and this is the problem, that the entire industry is structured around home run / 10x deals, when in truth, only the top 15, at best the top 25 funds produce that kind of returns EVER.

And I agree with you, it is only worthwhile to take venture money if the business model supports building a venture that can yield those kinds of returns.

However, that leaves a whole range of businesses that can be perfectly nice small businesses yielding anywhere between $3 Million to $50 Million in revenues, perhaps not super high growth, but profitable and every bit worthwhile for entrepreneurs to pursue.

Since we’re now in a technology cycle that is quite mature, the home runs deals are going to be a lot harder to find, but at the same time, these small/medium businesses can be built and sustained much more easily and effectively.

Silicon Valley’s venture capital, ostensibly, has no interest in these deals, even as mostly, this is the kind of business MOST VCs end up financing.

So why not cut the bullshit, and just create a formal structure which is meant to support these businesses?

Leave the top 25 venture firms focused on chasing the 10x deals. Create a layer of firms that focus on the 3x, 5x, 7x layer deals, and adjust the fund’s compensation structures accordingly. The problem is being created by these Tier 2 through Tier 5 venture firms and their partners getting compensated at the same level as the 10x baggers. It’s like all the Hollywood extras earning Tom Cruise level billing.

Finally, to me, it looks as though the best deal is for an entrepreneur who can bootstrap with no outside money, a business that makes 3, 5, 10, 20, 50 Million a year, and never sell the business. (s)he just keeps running it, enjoying it, and making money off it.

What do you say?

Sramana

Sramana Mitra Saturday, September 29, 2007 at 11:55 AM PT

JC,

I have no idea whatsoever on how the rest of the finance industry gets re-engineered, but if you follow the thread that Alex O. and I am discussing, you will see at least some beginnings of ideas on how the venture finance industry should be re-engineered.

Twofish,

You made a number of points, of which one, on when to take money is a topic I will do a separate post on. Indeed, that is a mistake a lot of entrepreneurs make.

As for MBAs making horrible entrepreneurs, that IS a problem. If our nation’s business schools, after taking huge sums of money for the education, cannot train at least 10-20% strong entrepreneurs each year, they are failing at one essential charter.

Some say, MBA is a degree for training middle managers. Then what is the degree to train leaders? Entrepreneurs? There is no Master of Entrepreneurship curriculum. In business, there is ONLY Master of Business Administration.

As it stands, it is the “miscellaneous” others, other than MBAs, who become successful entrepreneurs. I submit, that EVERY business school needs to be re-engineered, so that 25% of each years graduating class has gone through an Entrepreneurship focused program, and WILL be pursuing entrepreneurial career paths.

While you need to be a search engine guru to start Google, you don’t need to be that to start Rosewood Hotels, GAP, or Starbucks. You probably need to go work in an industry to develop domain experience, as well as functional experience. However, your training should prepare you for the eventuality, that you would be expected to go start your own business. And that’s something MBA programs need to look into incorporating into the curriculums.

Sramana

Sramana Mitra Saturday, September 29, 2007 at 12:10 PM PT

Good Post. Here is how I see it. The core issue is the % of the VC compensation that is derived from the carry. The 2% management fee, whatever that turns into 500K or a few million, would be fair compensation if they made most of their money off the carry and not this fee.

They are being paid by their investors who would be happy to pay their fees if they made them a healthy return. In addition, if they did make most of their money of their carry the entrepreneurs that they have invested in would be very happy too and we wouldn’t be having this discussion. However this is not the case.

Here is a link with supporting data http://tinyurl.com/ywo6w2 . The reason for this poor performance is the scarcity of hits (75% of exist are less than 50MM).

Now there have been other things that have been happening along the way, which have made things interesting. These changes have resulted in enabling a certain class of companies to get started, get their product/service to the market and gain traction for 10x less money. In fact the barrier to entry is so low that everyone wants to be a founder and no one wants to be an employee. Of course very few of these will result in home runs although many may see modest exits.

One could argue this is a good thing for VC. They could still get a 10x return if they invested 1MM and got back 10MM from a small exit. However this doesn’t fit their Model. I won’t expound, but is centers around human capital, the people that build the company.

This environment has created an opportunity for a new form of entrepreneurship that we have termed Tandem Entrepreneurship. This couples the required amount of financial capital with the right amount of high quality human capital. This enables a growing class of companies to flourish. Doesn’t solve all the problems but addresses some.

Sunil Bhargava Saturday, September 29, 2007 at 1:39 PM PT

Sunil,

Good thoughts. The only issue is how much money does the VC manage?

To invest $50 Million in chunks of $1M will require the VC to manage a portfolio of 50 deals, at which point your tandem entrepreneurship thesis fails.

What you call tandem entrepreneurship is Angel territory, and there, the management fee is zero, and the entire upside is buried in the success of the company. That, is a very different model, and doesn’t at all address the issue we are discussing.

It is, however, a good solution for entrepreneurs – to hook up with experienced and wealthy professionals who can actively help them build their relatively small businesses, flip them, and make a decent return for everybody concerned.

This is a very good model, and I am sure we will see more and more of it.

I think, the problem territory is the zone where $3-5 Million is required to build a $5 Million a year business, which can at best be flipped for $20 Million.

Sramana

Sramana Mitra Saturday, September 29, 2007 at 2:07 PM PT

Sramana,

This problem of VCs being overcompensated is an issue the world over. I am not too familiar with the VC situation in the US, but in India the VCs and PE Firms’ managers get paid tons of money. I know PE firm managers based in India who are paid more than CEOs of large traditional businesses (oil companies, Steel companies etc. to be precise). This is not including the bonuses they make! I am just talking about the salary components.
I guess it is the whole feudalistic money lender concept. The guy who has money gives it out and charges an extrordinary return. Money lenders have known to charge anywhere upwards of 5% per month as interest charges on the money they give out.
For the person who needs the money, the money lender is the only way… for he gives him the dough to ensure his own sustenance.
As has been explained in posts above, Entrepreneurial ventures (esp in the tech domain) are passion projects.
I know it is improper to compare VCs with money lenders, but they share the same sort of risks. Often times the borrower is unable to pay (either runs away from the town or commits suicide) and the money is completely lost. It is taking this risk into consideration that money lenders charge that high rate of interest. I wouldn’t deny that they have the upper hand and get to decide how much returns they will make from a certain transaction, but that’s all part of the game.
Although I am an MBA myself, I am also an entrepreneur and I completely understand how you can feel that money managers are paid too much. To be very honest, I totally agree.
What is the solution to this? If we solve this, we would definitely be taking a stab at the larger question of appropriate wealth distribution globally and not just among the VC and entrepreneur world. It should be remembered that the entrepreneur chooses to take the VC money and is not forced to do so. If they can raise the same money through other means, great! They are saving tons of equity and freedom from getting diluted!
I believe entrepreneurs should not take money from VCs until absolutely necessary. Until then, they can simply sit by the side lines and wait. There are several entrepreneurial ventures that do. In my field of interest there is a company named Zoho which has done precisely that and is running quite well despite that! There would be several others like that.

Kiran

Kiran Kumar Saturday, September 29, 2007 at 3:09 PM PT

Interesting analogy that you draw Kiran. In fact, the entire finance profession is a derivative of the ancient money-lender. And you are right, the psychology and the trade-offs are very similar.

As Alex points out above, the VC’s version of a “fair” term-sheet requires that “If the company has a subscale outcome, the VCs should get their money back before the operating team. “.

Why?

Is the operating team also not investing a large chunk of their lives to make the venture a success? And for any outcome at all for the VC to make money off, do they not NEED entrepreneurs? After all, keeping their funds in Money Market accounts is not what they are paid the fat management fees to do …

VCs NEED Entrepreneurs, just as much as Entrepreneurs need VCs. However, most VCs act as if they don’t understand this basic principle, and the “poor” entrepreneurs need to suck up.

And entrepreneurs, especially inexperienced ones, perpetuate these VCs’ egoes by sucking up to them.

This changes the dynamics of the negotiation, and inevitably, the entrepreneur has to go on the defensive.

Instead, entrepreneurs, hold your nerve, and negotiate from the point of a “co-money manager” with the VC. Not a desperate, poor soul who wears his emotions on his sleeves.

Trust me, I know all about the emotions you feel when you start and nurture a new venture. Just don’t show these emotions to the VC in this negotiation.

Remember, you are a co-money-manager.

Sramana

ps. I fully agree, entrepreneurs should take money if and only if it is absolutely necessary. Raising growth capital is easy, and you operate from a dramatically different negotiating point than when you have an unproven business model or unfinished product.

Sramana Mitra Saturday, September 29, 2007 at 3:58 PM PT

Sarmana:

The VC model works very well if they can land the hits. So lets examine the 5MM in 20MM out case. A question for you. How large will the team be in this company and what would their expectation in terms of monetary compensation be at exit? Also what do you think the length of time would be to the 20MM exit?

Sunil Bhargava Saturday, September 29, 2007 at 7:35 PM PT

It depends on the business, Sunil. If it’s a big deal oriented business, then you need fewer people. If it’s a business with lots of smaller deals, you need more of a sales force.

In general, it is hard to build a $5 M/ year business in less than 2 years, probably 3 years is more realistic. The only exception is an internet play, that spreads virally, and in that case, the people requirement can be quite small.

In terms of monetary compensation for the team, I would guess, it would not be worthwhile for the entrepreneur to do this unless he/she makes at least 4-5 Million. If it’s a founding team, then it becomes more complex.

Does that answer your question?

Sramana

Sramana Mitra Saturday, September 29, 2007 at 8:27 PM PT

To respond to your (and some others’) points and questions, Sramana:

A VC shouldn’t aim to make money off the management fee. Yes, if the fund is large enough, it receives a lot of management fee, but that fee is meant to be spent (and I believe generally is spent) on hiring the best possible people and resources to find and nurture the best deals.

The serious money is in the carry and that, by the way, usually isn’t paid these days until you’ve returned all of the committed capital to the LPs, including the management fee.

You say that VCs end up investing mostly in deals that aren’t home runs. In some cases, that’s because they thought that they were home runs, but were wrong. In other cases, a fund had a lower risk/reward profile. And, by the way, they got paid a lot less as a result. A low risk/reward fund doesn’t have a higher percentage carry than a high risk/reward fund. Quite the opposite, actually.

If there’s one thing that’s penetrated my dense cranium in the past forty-mumble years, it’s that risk and reward are always correlatd. Smart people can skew the risk/reward equation in their favor by, well, being smart and working hard. When I look at some of the top 5 firms (and y’all know who they are), I’m awed above all by how very smart the people are. There are only 5 top 5 firms (duh), and the 100th best VC firm in the business probably has fewer exceptionally smart people. There’s no big secret here, as I’ve also seen extremely smart people in the business world be the most successful and, by the way, make the most money. It’s not perfectly correlated, of course, and there are exceptions.

I don’t want to sound like an apologist for VC compensation. Is the pay good? Yes, if you do good deals. Is the job easy? Heck, no. It’s excruciatingly difficult to figure out the good deals from the bad. And it’s not because entrepreneurs lie. In my experience, almost all entrepreneurs are decent, honest, sincere and hard-working. But, just like VCs, they’re often wrong. Figuring out who’s right is much harder than I ever imagined, and it’s harder still when dumb luck and market vagaries add noise to the results.

In the end, I agree most with the “film star” analogy. The VC stars, who’s names you can read in the Forbes 400, are much smaller in number than those who toil away for good pay and, above all, the best job in the world :-)

Alex Osadzinski Saturday, September 29, 2007 at 9:15 PM PT

Some say, MBA is a degree for training middle managers. Then what is the degree to train leaders?

Real life.

If you want educational experiences that would help entrepreneurs, that you have to rethink the relationship between degrees, schools, and education. A degree program is typically an assembly line, industrial process that is best suited for people in professions that deal with assembly line, industrial processes.

You need to be a tech guru to start google. To start GAP, you need to be a clothing retail guru. To start Rosewood Hotels, you need to be a hotel guru. To start Starbucks, you need to know a lot about coffee houses. While you are gaining the industry experience, you just don’t have time to do a degree program, and if you want to help people to be entrepreneurs, you need to think about the structure of education.

Twofish Saturday, September 29, 2007 at 9:18 PM PT

Sramana:

Lets take 3 years to acquisition. Lets assume that there are 2 tech founders and 1 biz founder. They then get 2 employees on the biz side, 2 more techies to complete the team. This would be a team of 7 and a burn of about close to a 100K/month. With other expenses over 3 year you could get to 5MM burn.

Now lets assume that the biz founders wants to make 3 Million to make it worth his while, and the 2 tech founders are happy with 2.5 each. Now lets assume the hires are okay with 1.5 MM each. So the team would need to have 14 million to split amongst themselves. Assuming the the VC would want his LP’s to get a 40% IRR and with a 20% carry he would need a 50% IRR. Now not all deals are going to even get to a 20MM exit, so say lets say the Vc requires a 70% IRR to get to a risk adjusted return of 40% IRR. Then the VC needs a return of 14 MM on his 5MM investment. There is a missing 8MM.

I think the key issue is that you must have small teams for small exits to be viable for everyone. Else there just isn’t enough money to go around. To get the right team for a startup, everyone on the team needs equity. The 5MM investment doesn’t help keep the team size low. The 5MM is used to pay mainly for employees. If you keep the team size low then the burn is also low. So you don’t need 5MM. The trick then is how do you keep the team size low. Hence it is human capital issue for small exits.

Sunil Bhargava Saturday, September 29, 2007 at 9:20 PM PT

There are two unrelated issues here. Less VC compensation won’t translate to more Ceo compensation.

The VC model is broken Angels such as Jeff Clavier are cleaning up.

CEOs of startups are not in it for the salary a d yes, they do end up screwed for the most part. But these days there is a way for them to fare better because they don’t need much capital they can bootstap to a higher valuation and to revenues then take expansion investment with a higher valuation. The future for startup CEOs is better than for VCs, IMHO.

Tom Foremski Saturday, September 29, 2007 at 9:30 PM PT

Sunil,

You can save the tech team equity by outsourcing to India. That would save you 3 M in the exit proceeds.

The other 5M, I guess you need to get with a higher priced exit, or with the founders and VCs getting somewhat less.

Whatever, work out the details. But somewhere in that general area are a bunch of deals that bunch of VCs and entrepreneurs should focus on.

Sramana

Sramana Mitra Saturday, September 29, 2007 at 11:17 PM PT

Hi Alex,

Yes, it is a very hard job to prognosticate the future in terms of markets and technology, and then also pick which teams are the most likely ones to execute on the hypothesis. Precisely why, average players should not pretend that they are doing it. And they most certainly should not be compensated as such.

Sramana

Sramana Mitra Saturday, September 29, 2007 at 11:38 PM PT

Twofish,

I disagree with you. There is a structure in formal education that can be extremely helpful.

Tom,

I agree that the future of startup CEOs and Entrepreneurs is far brighter than the mediocre VCs. At some point, the scam is going to be exposed, and this party of fat management fees without commensurate returns will be over.

I pity the VCs who are at risk, since they will, by then, have lost all ability to actually “work” for a living and “produce” meaningful results in any area that is useful. Translation: unhirable.

This is why, I always advise young people to not pursue a VC career early on in their lives.

Sramana

Sramana Mitra Saturday, September 29, 2007 at 11:42 PM PT

If you can get quality talent tech or otherwise to work for a small company for moderate dollars and bring startup like passion to the table then having more money would address the problem. This is hard here and I think even harder if you outsource to India.

Less money at the exits for the founders doesn’t work and similarly on the VC side. That is why the VC biz is and will be a hits business.

As you increase the size of exits they become less and less likely and take more and more time and often larger teams. As they take more time the expectations of the teams in terms of compensation at exit increase and you are back to the same problem.

Sunil Bhargava Sunday, September 30, 2007 at 12:14 AM PT

Tom:

I agree with you there are two issues here.

VC compensation – which I don’t think should be compared to the CEO compensation at all. They have a deal with their LP’s. If they deliver to the LP’s then their compensation is justified. I think there is enough money and advice out there that fundable teams and ideas will not get exploited.

VC model is broken – Although performance has been lackluster, I don’t think it is broken; it just needs to shift to the right type of deals. This is happening with clean tech, bio tech and the tech deals that are big plays.

Now are there VC’s out there that can play in the new space? – I am sure there are. Are there VC out there that should get out of the game? – I am sure there are and they will at some point get out.

Sunil Bhargava Sunday, September 30, 2007 at 12:29 AM PT

Sramana,

To your comment “Precisely why, average players should not pretend that they are doing it.”

I agree, but you and I can’t do much about it alone. However, very fortunately, the market can, and does. The VC market isn’t close to perfectly efficient, but it’s not bad.

A VC’s customer is the LP, the investor. Now, when a VC invests in a company and sits on its Board, that VC has a moral, ethical and legal responsibility towards all of the company’s shareholders and stakeholders. Managing those dual loyalties is complex but certainly not impossible.

In the end, LPs won’t invest in a VC who doesn’t perform, and the best entrepreneurs — those who have the most choice of whom to work with — won’t pick a VC who hasn’t demonstrated value in previous investments. The average, or not-so-good, performers, are out of jobs or out of business. This isn’t theory, as you know…quite a few firms have shrunk or disappeared.

In every field of endeavor, getting lucky is a substitute for being good, but that’s life. Overall, I have faith that a competitive market punishes the incompetent and rewards the competent. More or less :-)

Alex Osadzinski Sunday, September 30, 2007 at 12:43 AM PT

Oops, I made a typo. I typed:

“If the company has a subscale outcome, the VCs should get their money back before the operating team. “

I meant to say (and this my personal opinion), that if the company has a subscale outcome, the VCs should get their money back before the operating team makes a big return.

It’s hard to structure a deal so that everyone is treated fairly under every possible scenario. But a well-structured deal should work correctly in most scenarios. My only point was that it’s unfair if VCs take all the money and entrepreneurs get little or none if the company is successful. We’ve all seen that happen. It’s equally unfair if a company limps to some kind of exit, the team makes a few million dollars, and the investors get little or nothing. That happens, too.

A good deal is one that treats all participants fairly under a range of outcomes.

Alex Osadzinski Sunday, September 30, 2007 at 1:01 AM PT

Sunil,

On your point about VC being a hit business, that is precisely what needs to change. We are in a mature technology cycle. There are smaller businesses that can be built successfully.

May be the way to do it is by mixing in some debt with equity. I wrote about this mechanism in my earlier piece, “Protect Your Dilution“. It depends on the business, though, what can or cannot be done.

Alex, yes I agree with the above statement wholeheartedly. Unfortunately, many of you colleagues in the venture business look at it as a zero sum game, and take every opportunity to exploit the naive entrepreneurs. You might say, if they are naive, they deserve to be exploited. That’s not exactly an ethical approach, is it?

Sramana

Sramana Mitra Sunday, September 30, 2007 at 11:06 AM PT

Sramana,

No, of course, exploiting naive entrepreneurs, or naive anybody, isn’t ethical. But naive people get exploited all the time, and it’s a hard problem to lick. Just walk into any auto dealership on a Saturday if you wish to view the phenomenon :-(

What you’re proposing is a component of the VC industry that would focus on smaller businesses with more modest outcomes. I don’t know how that’s achievable, because the risk may not be any lower. Aiming for a lower outcome on the same risk makes no sense. Lowering the risk can be accomplished by terms that favor investors more, but that’s probably the opposite of what you’d like to see.

You’ve raised a very thought-provoking conundrum.

Alex Osadzinski Sunday, September 30, 2007 at 1:05 PM PT

Alex,

Now, now – you don’t want our sophisticated VC friends to be held to standards of the car salesmen, do you?

The primary issue I see in these smaller businesses is the lack of a humongous TAM. Nonetheless, smaller TAM segments can also produce nice businesses. That’s the opportunity I am pointing out.

Now, if the entrepreneur is sufficiently savvy, (s)he would use this relatively smaller business as a cash cow, and perhaps come up with a subsequent idea that is substantially bigger.

Or not.

May be, instead, (s)he will focus on using the business as a cash cow and enjoying quality of life.

Or, if the business is high impact along some other vector, (s)he continue to make impact, while able to leverage the stability the business brings.

Or, and this is if everybody concerned wants to flip the business at that relatively smaller exit price, they flip and ride off to the sunset.

The risk may or may not be lower, that needs to be gauged on a case by case basis. I agree, if the risk is not lower, then it may not be a good investment. But just by virtue of the fact that the amount of money needed is substantially smaller, the risk is bound to be lower at least along that vector.

Sramana

Sramana Mitra Sunday, September 30, 2007 at 1:45 PM PT

This is a GREAT discussion! I am struck by the quality of the comments. Having run two VC funded startups (one succesful, one not), I am sure that my next one will NOT raise VC money at all, or at least I will delay that funding as far as I can.

Not raising money too soon has several advantages:
– Lower dilution for the team
– Avoiding the headache of having some VC novice on the board who thinks it’s his job to “add value” on a constant basis (vs when they have something truly value adding to say), and
– You are less likely to go “astray” since customers keep you on the straight and narrow.

I realize that not all startups can be built in this manner (some require capital to create even a basic workable system, e.g. a chip) but at least in software, I believe it can be done.

A thought provoking post, Sramana. Thanks!
Nimish

Nimish Mehta Sunday, September 30, 2007 at 11:13 PM PT

Sramana:

Mini Steel Mills, Soutwest Airlines etc all went after an unattractive part of existing markets. They succeeded because of fundamentally different models. I believe that these Lower TAM companies, which are the unattractive part of the market to traditional VC’s will be served in innovative new ways and by different people. I further believe this will be based on leveraging human capital much more efficiently as opposed to financial engineering.

Also the opportunities for the VC, where they can stick to their old models are as rich and plentiful as in the last decade but not necessarily as abundant in traditional enterprise software. I don’t think we are in a mature technology cycle in a lot of areas.

Sunil Bhargava Sunday, September 30, 2007 at 11:29 PM PT

Nimish,

You point out a scenario that I heard many senior executives complaining about … some novice VC sitting on the Board of an experienced CEO and acting like a clown, trying to “add value”.

More often than not, they end up being considered as no-ops, and most executives / entrepreneurs just develop mechanisms to tune them out.

Now, a reader might ask, why would an experienced executive end up with a novice Board Member? This happens, more often than not, when the executive has come in later, and is not the founder.

Indeed, the quality of discussion has been superb, and I am very grateful to all who have added thoughtful comments at this forum.

Sramana

Sramana Mitra Monday, October 1, 2007 at 12:11 AM PT

[…] has a post on venture compensation, but I found the part at the end more interesting: I would go so far as to submit, working for a […]

VentureWoods » The Importance of being Entrepreneur - India Venture Capital and Startup Blog Monday, October 1, 2007 at 6:49 AM PT

Sramana, very good thoughts. Having been an entrepreneur, and now a VC, I think the core of the argument is what motivates someone to be either an entrepreneur or a VC – and I think things break down as soon as the only answer is money. That is perhaps that reason why everyone asks “what is it really that you want to do?”

Now I agree that might be too idealistic. So the second part of the question is – to whom is the VC adding so much value that she is getting paid millions? Its not to the entrepreneur, its to the LP, who has very little choice in managing that asset class in an alternative manner. Now the value is not limited to what the VC does on the board of a company, but goes beyond that into figuring out what to play, how to play and how to stay in this business. You would agree that these are not trivial matters, given the mortality in this business.

Alok Mittal Monday, October 1, 2007 at 6:56 AM PT

[…] part of the VC-Entrepreneur Compensation disbalance discussion, my friend Sunil Bhargava of Tandem Entrepreneurs (check out what they do) sent me the following […]

VC Compensation & Returns - Sramana Mitra on Strategy Monday, October 1, 2007 at 7:52 AM PT

Alok,

Simple question: Is allocating assets and figuring out what deals to invest in that much more difficult than building substantial companies?

I don’t think so.

Sramana

Sramana Mitra Monday, October 1, 2007 at 10:56 AM PT

umm, apparantly it is, especially on a consistent basis… check the link out

http://paul.kedrosky.com/archives/001573.html

From an LP’s perspective, weigh that with the risk differential that a particular entrepreneur entails. Consistently (relatively) high performing venture partnerships are highly valued…

Alok Mittal Monday, October 1, 2007 at 11:53 AM PT

I think it is fair to say that VC’s, on average, are very highly compensated and that entrepreneurs, on average, make a lot less, but I don’t really see why this is a crisis or a “problem” that needs to get fixed.

VCs are paid by their LPs. LPs presumably pay a “market” salary to get decent VC managers and if you look at the resumes of most VCs its pretty clear most of them are accomplished enough that anyone trying to hire them is going to have to offer a great pay package. Sure some VCs aren’t worth it, but some are. You pay your money and take your chances.

As far as entrepreneurs/CEOs go, the same dynamic plays out. Some get much better compensation than others. A 3rd time entrepreneur who has been very successful often gets relatively generous terms from VCs and a relatively high salary from their board. A 1st time entrepreneur with little experience typically gets a very low valuation and a very low salary.

Why is there such a big compensation difference between the two classes? Simply because the supply of entrepreneur’s and ideas is much greater than the supply of supposedly “qualified” VCs and the demonstrated long term risk adjusted returns of invested in an a given entrepreneur are lower than investing a qualified “VC”.

Now I will readily agree the reality is that LPs are probably over-estimating the value of VCs, especially “top quartile” VCs, but what I think really makes no difference, because that’s what the people with the money think. Similarly, entrepreneurs might argue that the 3rd time winner is now fat and lazy and it’s a better idea to back the hard working young guy with a truly innovative idea, but that really doesn’t matter because it is the VCs that are making the decisions and their experience leads them to believe otherwise.

It’s called the free market people. If you don’t like it I believe that North Korea and Cuba still pursue a planned economy and my guess is everyone there enjoys the same level of poverty. The reason VCs are paid more than entrepreneurs is because someone, right or wrong, thinks that they are worth more. What’s the VC supposed to do, turn down the extra cash on moral grounds? I doubt any entrepreneur I know would do that. The reality is that VCs and entrepreneurs are actually both in the same business. They both start businesses and raise money from other people to invest. That the VCs get paid more than most entrepreneurs just means that they have found focused on an industry that with higher average returns, although much less dispersion about that mean. Entrepreneurs get lower average returns, but they also get the possibility of a huge departure from the mean return. This possibility for a truly outsized pay-off as well as all the intangible benefits of building their own firm is what keeps a lot of entrepreneurs grinding away despite what appears to be a much easier “ride” for VCs. Then again, look at the bios for the big VC firms, there are an awful lot of entrepreneurs there…

Bill Burnham Monday, October 1, 2007 at 12:08 PM PT

I was reading Micheal Lewis’s “The New New thing” about Jim Clark, Netscape’s co-founder and chairman (also founder of silicon graphics). Well written book about how Clarke went about reversing the VC-entrepreneur imbalance at Silicon graphics to become a billionare after the Netscape IPO.
Very relevant to this topic IMHO. The amazon writeup may sound different, but it is worth the $$ and energy.

Links:
http://www.amazon.com/New-Thing-Silicon-Valley-Story/dp/0140296468

Dipankar Sarkar Monday, October 1, 2007 at 12:27 PM PT

Alok,

Sorry, but I don’t need Paul to decide this. I already know the answer.

Both tasks are very difficult : picking, consistently, winning companies, and building sustainable enterprises.

However, the former is not substantially harder than the latter.

Sramana

Sramana Mitra Monday, October 1, 2007 at 1:08 PM PT

A check of the Forbes400, the highest test of personal value accrual, reveals entrepreneurs who either never got VCs involved in their businesses or waited as long as they could before doing so.

The key factor is time, or more specifically, how much the venture has progressed through the stages of its development. At Bootstrap we use the following definitions: http://www.bootstrapaustin.org/2007/09/5-stages-of-bootstrap-venture.html
If the founding team waits till growth (or never) to bring in a VC, they keep the lion’s share of the value. On the other hand, if they get a financier involved in the Ideation stage (or worse, in the Valley of Death), the value-accrual is reversed. This is as it should be.

The responsibility is therefore completely on the entrepreneur – if you’d like to accrue value and maintain control, don’t give the baby up for adoption!

Bijoy Goswami Monday, October 1, 2007 at 1:09 PM PT

Bill,

You should read the comment stream in the discussion, and not react off-the-cuff, since your comment is the 39th or the 40th on this list.

In particular, read the discussion Alex O. and I have had about 10x returns versus 2x, 3x, 5x returns, and how those types of businesses need to have a different compensation structure for all concerned.

And I beg to differ on that this isn’t a problem that needs to be fixed. It is. Because it is causing a lot of wasted resources, that could be channelized better.

Where you are absolutely right, is that the market will eventually (hopefully) speak. This discussion, above, is a way for the market to speak. Through the media, in this case. Later, it would be through the Limited Partners.

On whether entrepreneurs who are fat, lazy and happy on their 3rd or 4th venture are better than the hungry and hard-working first-time out ones – that is an interesting topic. I will write something about that, and open that discussion up later, on a different forum.

Thanks, Sramana

Sramana Mitra Monday, October 1, 2007 at 1:15 PM PT

Bijoy,

Absolutely correct. Entrepreneurship 101 should require a course on Bootstrapping, why or why not, and mechanics.

Btw, not all ventures can be bootstrapped. Chips, for example, is a notoriously un-bootstrappable segment.

Sramana

Sramana Mitra Monday, October 1, 2007 at 1:21 PM PT

Being an entrepreneur myself I would say that both tasks are equally ‘hard’ mostly because the GP as well as the entrepreneur both operate in a high mortality business -

However I would argue that the exposure to risk is substantially higher for the entrepreneur as compared to a VC – An entrepreneur gets one shot over the period of 2-3 years, without a decent pay cheque and often with a big personal sacrifice of time. A GP gets 10 shots over the same period of time, but (afaik) with a nice pay cheque and a 9-to-6 schedule.

An analogy that I can think of is walking through a plank few centimetres wide and couple of metres across. A GP gets 10 shots to cross over while the plank rests on the ground. An entrepreneur gets one chance while the plank connects at an altitude two big buildings at either side.

Both are equally ‘hard’ – but I guess we all know who is more likely to break bones.

Though, again as someone said earlier, entrepreneurs are not really driven as much with a money objective as they are with changing the world we live in – and being able to do that is as big an ‘incentive’ as any amount of compensation offerred to a GP.

nishant Tuesday, October 2, 2007 at 6:24 AM PT

[…] Hot Topics […]

Bootstrapping is One Answer - Sramana Mitra on Strategy Tuesday, October 2, 2007 at 7:19 AM PT

Nishant,
Interesting take on risk, but I think a lot of you are looking at a venture as a one-shot deal. Most entrepreneurs, by playing in new spaces, develop significant expertise and a market reputation that covers the risk on the back end. Even though Napster failed, its founders went on to do interesting things due to the reputation and relationships that they accrued during the “failed” venture.

In the end, the high-profile entrepreneurs get multiple chances to shape an industry–through ventures, big companies, VC, and media. Whats not to like about that if you’re passion-driven?

Vijay Goel, M.D. Tuesday, October 2, 2007 at 11:21 PM PT

I have found this to be a very interesting discussion.

I am a CEO for a VC-backed firm. I’ve been CEO of two other VC-backed firms and have done consulting work evaluating deals for other VCs.

I think that a lot of very good points have been made in the discussion but I have to argue to some extent with what I see as some of the basic assumptions.

Mostly, I feel that in this discussion we are greatly underestimating the value that VC’s bring to the business beyond money. It is true that VCs provide that vital financial blood, but it is also true that they generally contribute a lot to the development of businness plans and strategies. They also often bring a lot in terms of contacts and networks. My general advice to a CEO would be that if your VC is NOT bringing those things you need a new investor.

I also agree strongly that most people running start-up type companies are doing so in part to make money, but are also driven by other non-financial needs. I would say to a VC that if your CEO is driven by money alone you need a new CEO.

In terms of general fairness, I think that question is hard to answer. As has been noted in at least one other post here, both jobs are hard. And both involve very significant risks and a lot of work. As I’ve talked with many VC partners over many years I find they they find it very difficult to find the right deals and to work to make constructive input when they are covering such a broad spectrum and are dealing with things at a long arm’s length.

If you are not comfortable with extreme stress, dealing with unknown situations, and working insane hours don’t sign up for either job.

Dave.

Dave Rolston Tuesday, October 2, 2007 at 11:23 PM PT

No matter how you spin it, without VC or some sort of private/angel investment not many entrepreneurs would even get a chance. Where else are you going to get the money? Moreover, this is not all about the money that you make, but it’s about an opportunity and a chance to do what you really want to do (or good at).

Dmitry Grinberg Wednesday, October 3, 2007 at 4:24 PM PT

I think, in the last few posts, the theme that is emerging is the notion of serial entrepreneurship as a career path.

You take some money from Angel(s) on your first venture, learn some, build a bit of credibility and reputation.

You succeed or fail.

Do another.

Build some more credibility, experience, reputation.

So forth and so on.

I can tell you, I know a lot about this path, and it takes a humongous amount of energy to carry on in this mode. You have to really have a level of fire in your belly that keeps you going.

That said, it is an exponential growth learning curve, and I have personally enjoyed the journey.

Also, it helps to start early, since if you are starting on a serial entrepreneurship path at 40, by the time you have gone through your learnings, 10 years have gone by, and perhaps you don’t have the appetite for this kind of risk-taking anymore.

Or, you have made enough money to prefer being an Angel investor yourself.

I don’t know. I will tell you when I am 50 :-)

Sramana

Sramana Mitra Wednesday, October 3, 2007 at 4:38 PM PT

It’s a lifestyle, a passion. Not a career path (there are no promotions :-)) and not something you can do just to make money. It requires a passion that cannot be derived from “greed” only.
But what a blast it is! I get to create a business from scratch! And I get to see if my ideas are any good. And I get to work with great people. And I am challenged to the edge of sanity every single day.
I can’t imagine ever again having a “regular” job. I feel so fortunate, and that’s what keeps me going on the days when nothing seems to work, making the pilgrimages to Sand Hill, juggling 6 balls at once…

Umberto Milletti Saturday, October 6, 2007 at 12:14 PM PT

This is true. It’s a way of life, rather than a career path. And it makes “fitting in” inside large organizations, playing the politics, waiting for promotions … seem rather unpalatable.

Sramana Mitra Saturday, October 6, 2007 at 6:37 PM PT

Of all the comments there were 2 discussions regarding the timing..when to get a VC funding. Is there a formula?
Is there a valuation at stages like…
1. Idea formation
2. Idea modelled
3. POC of Product
4. Beta Product
5. Beta Customers
6. Paying customers
7. Regular Cashflow (Resellers).
I am an entrepenuer in India, with a Infrastructure product, and am between step 5 and 6 (i.e)the beta customers agree to pay, subject to some additional features to the product.
I am sorry if there is a slight diversion but I would like to have your knowledge on the following:

  1. I need only 0.5 million dollars, all the VC’s are not interested because the requirement is less.
  2. All the angel investors are thinking because of the following: a. The market is saturated/overcrowded(then they ask for market size!) b. You are not in internet space (we fund only internet start ups) c. You have a good team but are first time enterprenuers. d. you dont have US presence (if you have gulf presence they say there is no focus!)

Entrepenuers (these are my views only)…..
1. Any product can be improved upon and no market is saturated.
2. Market size determined by analysts eg Gartner report, IDC report etc are very specific, Actual Market size is more a gut fell if you are in that field for few years….
3. For 0.5 million dollars I dont want to part with lot of equity…

Look forward to your advise

Ramaha Tuesday, October 23, 2007 at 4:29 AM PT

Hi Sramana,

I need to know about venture funding for an idea. Pl let me know to whom I need to contact for this.

Thanks,

Chandra Mouli

mouli Sunday, December 23, 2007 at 7:17 AM PT

[…] SM: What you are bringing up is an issue many entrepreneurs have experienced. A total disrespect and arrogance on the part of the VCs. They forget, that the sole basis of their existence is to “serve” entrepreneurs, and not the other way round. I don’t know if you’ve read it– I wrote a highly controversial piece last year called The VC-Entrepreneur Compensation Disbalance. […]

Lars Dalgaard and his Success Factors (Part 6) - Sramana Mitra on Strategy Tuesday, March 11, 2008 at 8:47 AM PT

Entrepreneur Home Business | Entrepreneur Home Business…

……

Entrepreneur Home Business | Entrepreneur Home Business Monday, February 16, 2009 at 4:11 AM PT

Is there no concern these days where cash is king and the VC’s with the cash are abusing this power to squeeze the entrepreneurs are in no position to negotiate. I have also heard some VCs colluding amongst themselves in a syndicate before the lead term sheet is signed. What can we do?

Jeff Thursday, April 23, 2009 at 2:44 PM PT

I agree with the notion that the VCs are vital to many ventures, but in return, the entrepreneurial pursuits are the lifeblood of those VCs. I would caution the VCs from ‘biting the hand’ too hard.

They generate resentment, distrust and perhaps under this administration, more careful ‘viewing’ of recent deals and syndicates.

Dave Friday, April 24, 2009 at 9:56 AM PT
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