Well now. If the investors are so good at what they do then why do the vast majority of the companies they fund fail?
As in the case of Techstars which invested in ToVieFor's "Hurricane Melanie" (whose cofounder quit right after getting in) simply being impressed by someone who knows the ropes isn't all it's cracked up to be. Her presentation was said to be of "investment bank quality". Oops. Sure it was a good presentation that's about it though - by her own words.
Investors and incubators love the types that know the ropes and talk a good game and have confidence.
It would be an interesting test to hire a group of actors to play the roles of young entrepreneurs with a so so idea.
And see if the investors actually fund the idea (since they fund people not ideas.) And then say "April Fools".
Something close to this happened a while ago with an actress impersonating a founder with some totally ridiculous idea. It took quite a few of the people in the audience until approximately midway into the presentation before their bs meters went off. I wished I remembered the occasion. I will do some searching.
Because the vast majority of companies fail. Especially tech startups. The investors know this. They are just trying to be marginally ahead of that curve because the payback on one in ten is astronomical, and more than makes up for the other 9.
"certain freedom that they have in not knowing what's already been "proven" not to work"
Agree. This in fact is actually one of the things that allows younger people to take a chance and succeed whether it be in their parents business or in something they've never done before. Bringing younger people in is not all about younger people having more energy. It's also not being jaded and clouded by things that "simply won't work".
In other words knowing to much can be a disadvantage.
Having started a business out of college in something that I knew absolutely nothing about and being laughed at by competitors I experienced this firsthand.
When I started the second business although what I learned was a help it also hindered me. I knew how difficult things were (and I had something to loose as well..)
Entrepreneurs shouldn't overly use buzzwords to describe the business. "We have a cloud-enabled, big data, social graph platform..."
This is a pet peeve of mine -- what if they do? I've had several reactions of that kind, as if the founders in the case started a company looking for the buzzwords.
I would think there would be value in framing it in terms of "why we're not just another cloud + mobile (or whatever) company". Go out of your way to show that while it's nice that you happen to be "on trend," it wasn't because you just sat around playing Buzzword Bingo until you had a fill-in-the-blank idea. Instead, it's a real solution to a real problem, and the reason it happens to use something trendy is because the new technology allows you to bring forward a solution that wasn't beaten into the ground 10 years ago.
The biggest problem is that buzzwords are broad and show that you have no idea what your actual thing is. Whats "cloud-enabled"? Linux is "cloud-enabled", sshd is "cloud-enabled". Or "big data"? Just vast amounts or are you mangling them?
Take an actual product and describe it. Let's say: Github. Github is a hosting service for a distributed version control system allowing programmers to collaborate and share code. It is not a "cloud-enabled, community-driven service for big data handling", although each of those attributes certainly fits as well.
Being able to express the first and not the second shows that you have an idea, not banging together broad concepts in some kind of collider.
The only thing an investor should be worried about is whether the entrepreneur can think creatively and get shit done. Fund-raising protocol is overrated.
INVESTOR SAYS: "Oh, shit, he asked me to sign an NDA -- what a noob!"
So sure, that's a faux pas. But it's the investor who is a fool if he doesn't at least see what the noob has cooking. Bowing to dogma won't help you excel in the Valley; it will only help you blend in.
Now we know what to avoid when talking to a VC. But what do you say when you have already been flagged as an amateur? How do you convince them otherwise?
Succeed. As long as things are going well whether or not you are an amateur is irrelevant.
For example, Mark Zuckerberg and Andrew Mason would have been called amateurs if their business didn't take off like a rocket and never look back. Kevin Rose was considered a rockstar for a while and when Digg started to decline everyone changed their minds about him.
This is usually short for "our idea is a special snowflake that no one else will ever think about unless you let it slip, but if it leaks out, anyone could rip it off in 5 minutes."
Your idea is only unique if it's uniquely bad, and if you can't execute better than someone else who randomly hears your idea, you're not worth investing in.
I once did some contract development work for a startup with non-technical founders who had me sign an NDA up front. They were very impressed with their idea, but not so impressed with the importance of executing it. They never got funded, I never got paid. Lesson learned.
"Your idea is only unique if it's uniquely bad, and if you can't execute better than someone else who randomly hears your idea, you're not worth investing in."
No, there really is work that really should be called 'intellectual property' (IP) and might be new and unique. And as the US DoD has understood well for decades, there really is IP that should be marked 'confidential', 'secret', etc.
A current example of such IP might be the Google ranking algorithm.
More broadly a claim that there are no ideas that are new, unique, and good is in wild conflict with essentially all of peer-reviewed original research that, typically, is supposed to be "new, significant, and correct".
Information technology (IT) entrepreneurship and venture capital nearly totally assume that all the technical work is just routine software. This is a HUGE mistake. But with this mistake, the only unique or new aspect of the project is just the 'business idea' that might be ripped off.
Such business ideas actually CAN, EVENTUALLY, get protection, that is, a 'barrier to entry' or a 'Buffett moat', from effects in the market, say, Fred Wilson's "large networks of engaged users". But getting this protection requires success in the market which takes time, and between first contact with a venture firm and the protection in place, the business 'idea' can be vulnerable to being copied and the business opportunity taken.
Some entrepreneurs believe they have evidence that some venture partners have received such business 'ideas' from entrepreneurs, told the entrepreneurs to get lost, and given the ideas to buddies of the venture partners.
So, some entrepreneurs want a venture firm to sign a 'non-disclosure agreement' (NDA) before discussing the business idea.
Alas, at least in IT, venture firms will nearly never sign.
Generally, as an opening negotiating position, it is in the interest of the venture firms to take a 'stance', if they can get away with it, that their money and business 'acumen' are really valuable and that the entrepreneur has nothing new, unique, powerful, or valuable.
Entrepreneurs can counter by saying that all the money is just green, indistinguishable, and fungible, and the venture partners are nearly never qualified to be Chief Scientist, CTO, CIO, Server Farm Manager, Software Project Leader, Software Developer, Network Architect, or Network Administrator and, thus, have at best only peripheral knowledge for the business success.
Well, information technology (IT) entrepreneurship certainly is heavily Amateur Hour although I don't know if the main fault is dumb entrepreneurs who propose too few good projects or dumb venture capitalists (VCs) who can't handle their e-mail.
How do we conclude Amateur Hour? Because returns just suck. As I recall, in 1994, the fastest 'water heater' mainframe had a processor clock of about 150 MHz and sold for maybe $1 million. Now can get a cell phone with a clock about 10 times that fast for less than $100. More generally computer hardware has gotten POWERFUL and CHEAP, both VERY quickly. Similarly for infrastructure software and the Internet.
Still, on average returns suck. Shocking situation.
How do we conclude returns suck? Can look at VC Mark Suster's blog 'Both Sides of the Table' and in particular in
"The Coming Brick Wall in Venture Capital & Why This is Good for US Innovation"
with a graph showing the big rise and bigger fall in the number of VCs with claims that some VC funds have not been able to return to the limited partners even their original investment, i.e., have lost money in every sense, and in
"What’s Really Going on in the VC Industry? What Does it Mean for Startups?"
with a table on big declines in university endowments, the declines because of or at least in spite of investments in VC funds.
For evidence of Amateur Hour, the article has a lot on the VCs. My view is that even if they got a nice description of 'another Google' in their e-mail in-box, they would ignore it.
To me, it looks like the VCs are consistently the dumbest people in the room. They are not the people I respected in graduate school or at Yorktown Heights and are nearly never someone I would hire as Chief Scientist, CTO, CIO, Software Manager, Software Developer, User Interface Designer, DBA, Server Farm Administrator, Network Architect, Network Analyst, Network Manager, or CFO.
Beyond the bad financial returns, here is one point of evidence: As we can see in the article, often the VCs think in terms of simplistic and nearly meaningless patterns. What they appear to be looking at, believing in, and acting on is evidence hardly better than tea leafs. Even more seriously, in IT (the situation in biomedical might be much different) the VCs don't have even as much as a weak little hollow hoot of a tiny clue what to look at or how to evaluate projects. Borrowing from a movie, "They are digging in the wrong place.".
For more on the patterns, there is "Cold-calling our office line.". That this is bad is definitely looking at patterns in tea leafs and as silly as the evidence, say, in 'The Music Man' of a boy buckling his knickerbockers BELOW his knee. Even more seriously, it is usually just crucial to 'cold call the office line' to pass a message to the VC that did send an e-mail; the VCs are so bad at handling e-mail that otherwise the e-mail is almost surely due to RIP in the bit bucket.
More evidence is in the "Saying they are completely unique, and that there is no competition. Groan.". Groan back to you, doofus. VC, if you are reading this and are insulted, fine with me: No good IT entrepreneur should dare to have you on their Board.
So, a standard VC claim is "Whatever idea you have, at least a dozen other people have had the same idea and are working on executing it.". Let's examine this claim: So, for an idea, take all the people so far who have thought of it and, for each such person, take the time and date when they first did think of it. Now, sort that data into ascending order on time and date and look at the first person from the sort; almost surely (probability 1) that person thought of the idea first, before anyone else, and, thus, is a contradiction to the claim. Done.
More generally, the claim is just nonsense: Indeed, essentially all of peer-reviewed research is judged on the criteria of new, correct, and significant. If there were no new ideas, then there should be no new peer-reviewed papers, but each year there are many thousands of such papers. Moreover, over nearly any 10 year interval, we can find very powerful, new results we would not want to be without.
So, the VC claim of nothing new is uninformed, misinformed, ignorant, arrogant, and just plain wrong.
Really, the claim is from a strong desire of a VC to trivialize and denigrate entrepreneurs and their work. For the poor returns, we have just identified one sufficient condition.
Similarly, a common VC claim is, "Ideas are easy. Execution is hard.". No, good ideas are hard and then successful execution is routine!
Execution? The US is just awash in millions of businesses, coast to coast, on Main Street that do execution quite well, thank you. The US is also awash in people who have done well managing groups from a dozen to 1000 dozen persons in, say, business, government, the military, etc. In the US, good execution is common.
Good execution is so common that even VCs can understand a lot about execution. Moreover, in the work of a CEO, execution is about all the VCs understand. So, the VCs are willing to say that what they do know, execution, is difficult.
But the VCs definitely do NOT understand finding good, new ideas and, thus, dismiss that work as "easy". Dumb. Part of the reason for the VC problem with 'ideas' is that one could count with shoes still on all the VCs in the country who have published a peer-reviewed paper in an archival journal of original research or who are qualified for a tenure track faculty position in a technical field in a research university or as a problem sponsor in NSF or DARPA.
Then there's the common "Using a banker to raise money or sending in something over the transom (cold e-mail). Good entrepreneurs can always find a warm intro to a VC."
So, it is common on venture firm Web sites to advise an entrepreneur to get an introduction via a lawyer, banker, or VC portfolio CEO. So, this VC wants to rule out any entrepreneur who gets an introduction from a banker.
Next, the "over the transom (cold e-mail)" is another favorite way for VCs to denigrate the work of entrepreneurs. That denigration is just posturing, playing 'hard to get' because as is easy to see for nearly all VCs it is easy enough to get their e-mail address and phone number, send them e-mail, and leave them a phone message.
The worst is the "Good entrepreneurs can always find a warm intro to a VC." Nonsense. Total 100% reeking, fuming, bubbling, sticky, toxic nonsense. Here VCs are breaking their arms patting themselves on their backs about how 'well connected' they are. Nonsense. Also they are asking their 'friends' to do their work for them. In fact, VCs are very poorly connected with some of the very best sources of 'good' entrepreneurs! I met and worked with a lot of 'good' people, some who became good entrepreneurs, in graduate school, as a university professor, and at Yorktown Heights, but in those places I never met anyone who became a VC. In particular, VCs are NOT very technical and, thus, are not well connected with entrepreneurs with high technical qualifications.
Actually, we know a lot about how to conceive of good, new projects to field valuable results to markets. There is a long, astoundingly successful history of such projects in applied math, applied science, engineering, and technology, and IT, in both business and the US DoD. The VC simplistic, ignorant pattern matching is ignoring this history. Dumb.
Here is a fact that should wake up each VC like 50 gallons of ice water over their heads: Look at the 'home run hits' of the past few decades and see Apple, Twitter, GroupOn, Facebook, Google, Yahoo, Cisco, HP, Oracle, Dell, Microsoft, Intel, Sun, IBM. Now, find the 'pattern' in these! May I have the envelope, please? Here it is: The pattern is, there isn't one! Instead, have to look at such case one by one. More generally, fundamentally, nearly necessarily, are looking for things that are NEW. Sorry 'bout the difficulty of working with things that are new!
The VCs, then, have been blinded by their 100-200 daily e-mail messages: Their job is to find golden needles in a lot of straw, but their 'pattern matching' is based on what lessons they draw looking at the straw and not the needles.
Really, nearly all VC remarks on what they want is nonsense to cover over what they really want. What they really want is an opportunity to make a lot of money easily. Their main idea is to wait for an entrepreneur to do really well but start a vast project with half-vast planning, run out of cash, and be willing to take a VC check with some really onerous terms. So, fundamentally they are eager to pursue 'vulture capital'. But, vultures eat dead meat and, net, are not very successful.
This VC business model is not working well. Reasons:
(1) The VCs evaluate the projects not at all like a serious CEO would but much like an accountant would. E.g., the VCs want to see 'traction' significant and rising quickly. That's about as deep into anything meaningful as the VCs get. So, really, the VCs look at an egg or a chick without enough 'diligence' to tell if the species is a chicken, pigeon, or eagle. Dumb.
(2) The VCs are looking for projects that DO have 'traction' but also have some poor planning. NOT good.
Thankfully for US national security, VCs are not NSF or DARPA problem sponsors!
As in the case of Techstars which invested in ToVieFor's "Hurricane Melanie" (whose cofounder quit right after getting in) simply being impressed by someone who knows the ropes isn't all it's cracked up to be. Her presentation was said to be of "investment bank quality". Oops. Sure it was a good presentation that's about it though - by her own words.
Investors and incubators love the types that know the ropes and talk a good game and have confidence.
It would be an interesting test to hire a group of actors to play the roles of young entrepreneurs with a so so idea.
And see if the investors actually fund the idea (since they fund people not ideas.) And then say "April Fools".