Is venture capital model no longer working?

The money manager mentality also meant that VCs became risk averse

KUALA LUMPUR: An expert on venture capitalism is of the opinion that the venture capitalist model is broken.

NOT BEYOND REPAIR: Green believes that the VC model is broken but it can still be fixed.
 
Jordan Green, chairman of the Australian Association of Angel Investors, said the latest generation of VCs has not been delivering results.

"Up until the mid-90s, VCs could reap a double digit return on investment on the companies they invested in," he told Bytz on the sidelines of the Asian Business Angel Forum (ABAF) 2012 here.

Green said today's VCs fail to do better than their predecessors because of their money manager mentality, and they aren't capable of advising entrepreneurs on how to viably commercialise their products.

"Venture capitalism predicated on the idea that people in the VC firm would be able to help the startups they invest in to grow effectively. But you need to have business experience to do this, " he said.

According to Green, many of today's VCs have the academic qualifications but not the experience of having run a business.

This situation arose when VC firms started to institutionalise, to give themselves bigger funds to work with, he said.

However, as the establishments got bigger, there was not enough qualified people with the right business experience to hire.

"As a result, those without any entrepreneurial skills could not properly help the startups move forward," Green said.

"And the money manager mentality also meant that VCs became risk adverse and would only fund startups when they started being profitable. This created the 'VC gap.'"

The gap is where entrepreneurs have difficulty getting funding between starting up and starting to show profitability - the period when VCs are most needed.

Green believes investing in a business requires empathy, and is not merely an intellectual exercise.

Malaysia is moving in the right direction by starting angel investor networks because this will give startups here an alternative to VCs when they need funding for their fledgling products and services, he said.

"Angels are actually replacing the VCs of yore. They are the experienced business people who can advise entrepreneurs on how to bring their products to greater heights," Green said.

The Malaysian angel investor network is still young, with two known agencies - the Virtuous Investment Circle and Pikom Angel network. Another is set to emerge later this year and is called the Malaysian Angel Business Network.

However, Green said, the VC model can still be saved if venture capitalism returns to its original investment model.

He said this will require braver institutional investors and a better understanding of how VCs should work.

"With the original intent and model, they can make better decisions and better help startups grow faster," he said.

ABAF is organised by Cradle Fund Sdn Bhd, which manages an investment programme that funds technology startups in the country.

The forum is aimed at bringing the best of Asia's angel investors, venture capitalists, decision makers, policy leaders and entrepreneurs to one location. Some 500 delegates gathered to hear 30 speakers at this year's event.


By JO TIMBUONG bytz@thestar.com.my

What Great Entrepreneurs Have In Common?

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By Drew Hansen Prime Movers

Image via Wikipedia What does it take to be a great artist?

Richard Russo evokes this question near the end of his 2007 novel, Bridge of Sighs. In it, he chronicles Lou Lynch, Jr. (Lucy) and his friend Bobby Marconi, who grew up together in a small town in upstate New York. The two friends couldn’t be more different. In sixty years, Lucy has never left his hometown, but Bobby on the other hand, leaves as soon as he graduates high school, fleeing Thomaston never to return. He eventually becomes a world-famous artist and lives the rest of his life in Venice. After Bobby passes away, a reporter interviews Lucy to learn more about his friend’s childhood.

On Saturdays, the two friends took turns surfing in the back of Lou Sr.’s milk truck. The thrill came when the truck, turning unexpectedly, caused one or the other to lose his balance and crash into the side.  Unlike Lucy, who braced himself before turns, Bobby let go and even shut his eyes. In Lucy’s words, “Bobby wanted what was coming down the road to be a surprise, even if it meant he got hurt.”

In my previous post, I explained that entrepreneurs are similar to artists because they’re outsiders. In my opinion, Bobby’s behavior represents a willingness to be vulnerable, another trait that entrepreneurs and artists have in common.



Anthony Tjan, founder of the VC firm Cue Ball, calls vulnerability the defining trait of great entrepreneurs. He describes it this way:

Active vulnerability comes from engaging in a contemplated risk that considers and hopes for the payoff, financial or otherwise, that will be worth the effort. Active vulnerability is in essence proactive and informed risk-taking.

I describe entrepreneurial vulnerability differently.

An entrepreneur’s work, like that of an artist, is a form of self-expression. When painting, an artist injects her canvas with her beliefs and values — knowingly or unknowingly — and the completed painting becomes an extension of herself. Likewise, when an entrepreneur founds a company, she imbues it with her opinion of how the world ought to be. It, too, springs from her deepest yearnings, making it unique and personal. There is no guarantee that the audience or market will accept her work. Vulnerability, then, is the willingness to reveal one’s true self and risk misunderstanding, ridicule, and even rejection.

At the core of human experience is a longing to be accepted. Some people, to satisfy this innate desire, conform to the norms around them, but in the process, compromise a part of themselves. Other people, the misfits, resist the temptation to fit in and remain true to themselves. As exhausting and demoralizing as it can be, the misfits’ willingness to defy norms gives life its nuance and beauty.

Dan Pallotta explains where this strength comes from:

To embrace the misfit in oneself is to be vulnerable. It is to forsake the easy acceptance that comes with fitting in and to instead be fortified by a kind of love, really. A love of life, a love of wonder, and, ultimately, a sustaining love for oneself. Far from egoism, that love for oneself is a measure of one’s love for others, for humanity. And it is only from love that great ideas can be born.

The greatest artists, entrepreneurs, and leaders don’t seek acceptance. Instead, their love and compassion fuel a yearning to make a ding in the universe and persevere despite rejection.

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