Transparency in the venture capital process

The world would be a better place if there was more transparency in the venture capital process. That is my strongly held view, and it is one of the reasons I write this blog. So I was interested to read about TheFunded on Vecosys and Alan Patrick’s thoughts on information asymmetry in the VC deal making process.

For those of you that don’t know TheFunded is a site where VCs are rated and reviewed. There is nothing about Esprit (all contributions welcome) on there yet but there are some good insights to be had on some other funds – although I would add the caveat that it is easy for a reviewer to conceal his identity and even the best VCs will have ruffled some feathers.

Anything like this that takes some of the mystery out of venture capital is helpful.

I try to do my bit as well. Beyond writing this blog I:

  • Offer my time to entrepreneurs who want to understand how funding options might apply to their business (even when they would never be an Esprit deal)
  • Try to give good feedback on what I like and don’t like about all the deals I look at
  • Give clarity into my/our decision making process as we progress through a deal

I could do more, I’m sure, and if I am ever looking at a your company feel free to call me out if I could be clearer or more transparent.

That said, making an investment is more of an art than a science. When you start looking at a company you don’t know what you don’t know, so opinions and process are bound to shift as you go through a deal. The other side of the equation is that to complete a deal most VCs need the support of their fellow partners – this adds a further element of unpredictability.

Having been at this game for seven years now I think the most important thing for a VC is to know what you are looking for in a deal and have the confidence to be up front about it. Without that it is nigh on impossible to be transparent.

The other thing I wanted to say was in response to Alan’s post. I guess I see the whole deal making and due diligence process a little differently to him. On the one side, most companies that are attractive to VCs are able to get pretty good information about the VC industry. There are good advisors that they can work with, and there are lots of angels and execs who have been round the VC loop who can also help. And on the other side, for the right companies taking venture capital is a value enhancing process. As well as adding value post investment the due diligence conducted by a good VC will often improve your understanding of your company and your market. For these reasons I think a lot of the best companies seek venture capital rather than avoid it.

But then I would say that wouldn’t I 😉

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  • X

    At the same time, VCs should also be transparent and honest in not over-hyping some of their portfolio companies. In case of Espirit, Zeus is a classic example – company with good technology but always stuck in the wrong marketplace with the wrong people. Even after a decade of existence, the company has not achieved much. The thumb rule is that if a VC backed company does exit (trade sale or IPO) in a decade then there is definitely something wrong!

  • X

    At the same time, VCs should also be transparent and honest in not over-hyping some of their portfolio companies. In case of Espirit, Zeus is a classic example – company with good technology but always stuck in the wrong marketplace with the wrong people. Even after a decade of existence, the company has not achieved much. The thumb rule is that if a VC backed company does exit (trade sale or IPO) in a decade then there is definitely something wrong!

  • nic

    Over-hyping doesn’t help anyone, but at the same time we have a duty as directors and investors to build value in our companies and marketing is an important part of that.

    With regard to Zeus – we have been very open that the early years of the investment didn’t go as we hoped. The last three years have been a different story though and the new management team have done a great job in turning the company around and making it something we can all be proud of. If you don’t want to take my word for it have a look at the customer list or some of the PR.

  • nic

    Over-hyping doesn’t help anyone, but at the same time we have a duty as directors and investors to build value in our companies and marketing is an important part of that.

    With regard to Zeus – we have been very open that the early years of the investment didn’t go as we hoped. The last three years have been a different story though and the new management team have done a great job in turning the company around and making it something we can all be proud of. If you don’t want to take my word for it have a look at the customer list or some of the PR.

  • Sumitra Menon

    “VCs are only interested in coming to the rescue of victory” ? There are a series of interesting articles from Silicon Valley entrepreneur and strategy consultant Sramana Mitra. Check this out! http://sramanamitra.com/articles/investment-thesis-interviews-with-vcs-angels/
    http://sramanamitra.com/articles/serial-entrepreneur-interviews

  • Sumitra Menon

    “VCs are only interested in coming to the rescue of victory” ? There are a series of interesting articles from Silicon Valley entrepreneur and strategy consultant Sramana Mitra. Check this out! http://sramanamitra.com/articles/investment-thesis-interviews-with-vcs-angels/
    http://sramanamitra.com/articles/serial-entrepreneur-interviews

  • Hi Nic

    You would say that of course 😉

    The nub of Information Assymetry theory is that industries where it is prevalent by and large cannot root out their rogues, establish trust and thus capture the most value, and – in theory therefore – the people/companies they most want to attract are the ones most able and interested in avoiding them.

    Of course, extending the example of US healthcare to VC’s was merely a thought experiment…some of my best friends etc etc 🙂

  • Hi Nic

    You would say that of course 😉

    The nub of Information Assymetry theory is that industries where it is prevalent by and large cannot root out their rogues, establish trust and thus capture the most value, and – in theory therefore – the people/companies they most want to attract are the ones most able and interested in avoiding them.

    Of course, extending the example of US healthcare to VC’s was merely a thought experiment…some of my best friends etc etc 🙂