A common misconception about venture capital

Third Panel, Exeter 2011 Day 3The Friday before last I was on an investor panel at the Like Minds conference down in Exeter.  As I’ve mentioned before I do these panels in the hope of making the process of raising money more widely understood and therefore easily accessible, thereby encouraging more entrepreneurs to start companies.  You can find a liveblog of the panel here, and the picture on the left shows me on stage at the event with Sam Sethi of Skadoo.sh.

After the panel session one of my co-panelists, Chinwag’s Sam Michel, repeated something I had said back to me, and that something has been running round my head ever since.  Last week was supposed to be a holiday, although I ended up going to the US for two days, and for us holiday time is family time, and I try to keep the work to a minimum, which means no blogging.  Hence this is my first chance to share the thought.

Hopefully by now you are almost overcome with a desperate eagerness to know what it was that Sam chose to repeat back to me.  The sharp eyed amongst you will have deduced from the title to this blog post that it relates to a common misconception about venture capital.  In fact, ‘misunderstanding’ might have been a better word, and I toyed with the idea of using ‘Why venture capitalists are misunderstood’ as a headline….. (that’s a joke 🙂 ).  The words were (more or less):

Venture capital is for accelerating the development of existing companies rather than funding them at the true startup stage

Sam’s point was that too many people in the UK and Europe think that VCs should fund, or do fund, the true startup stage.  The unfortunate consequence of this misconception is that time is wasted trying to get meetings and investment from VCs, and all to often this turns to dislike of, or even contempt for, the VC industry.  A common perception is that the VC industry is flawed because it doesn’t take enough risk.

That’s unfortunate.

I work as a VC because I believe that for the right companies a timely investment of say £5-20m can accelerate growth and make the difference between being a highly valuable market leader and a much less valuable smaller player.  The caveat ‘for the right companies’ is crucially important though – only a very small subset of companies are in the right place at the right time with the right product and the right team to have a shot at owning a market.  For the rest it is a mistake to raise venture.

Also unfortunate is that VCs are responsible for this misconception.  Not in any deliberate way, but rather because as an industry we haven’t traditionally felt the need to be clear about what we do and don’t do.  One of the challenges is that presenting a clear picture requires getting across a complex message – some VCs do fund the true startup stage, or at least they do so occasionally, whilst most others, including my fund DFJ Esprit, do a small number of seed deals each year.  These are not true startup companies, they usually have at least an early product we can look at, but they are not that far along either.

The fact that sections of the entrepreneurial community believe the VC industry is doing a bad job isn’t good news for anybody.  It can only lead to fewer people starting companies and fewer companies capitalising themselves properly.  It probably also has negative consequences for government policy.

Hopefully this post has made things a little clearer.

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