Published Spring 2020
“The greater fool is someone with the perfect blend of self-delusion and ego to think that he can succeed where others have failed.”
- Alan Sorkin 'Newsroom'
This post is for all those founders who have tried to raise money from early stage investors and VCs to kick start their idea and failed
Think of it as an explanation of why "it's not you… it’s them..."
Let’s begin with a bit of background. Our RoboVC model is now 3 years old
It has analysed and cross referenced the investment behaviours of over 2500+ VC and early stage investors
Sadly all the evidence suggests VCs are not very good at picking winners.
Indeed the accumulated evidence indicates the contrary.
They have an extraordinary, collective talent for identifying and funding losers.
And this raises the question… Why?
Experience has taught us you won’t find the answer to this question in the data.
You only stumble across it when you try and raise the investment for your first VC fund.
We tried to raise funds for our RoboVC.
We presented overwhelming evidence that the model could consistently deliver results in the top 5% of VC Funds
What we discovered during our efforts to raise a fund was the barriers to entry, (or) more accurately the price of entry to become a VC, is just too high.
So high in fact it is obvious to any intelligent investor there are smarter and easier ways to make money than starting a VC fund.
Why?
Well it is a common request from the anchor LPs (ie HNW, Pension Funds, Family Offices) to secure a sizeable chunk of the fund's equity, plus first rights on the profits & carry generated by the fund.
In theory it's a discount offered to the LP who helps get the VC off the ground, and
Yes, these type of rent seeking preconditions are common across emergent VC, PE and Hedge Funds.
Basically your first investor takes home the cream (ie gets to eat) while you get to do all the work (ie run the business on fumes).
Now this simple insight goes a long way to explain why the choices made by the overwhelming majority (80%+) of VCs fail to beat investing the passive market index
The LP’s - through the limitations imposed by their risk/return model - impose the preconditions of failure by choosing to fund compliant losers at the expensive of aggressive winners
The truth is any prospective VC, with a skill for consistently picking winners, looks at the deal on offer and walks away
Suggesting the really smart, savvy operators, who would have excelled in the business of picking winners, are busy making money elsewhere
Certainly that is the choice we have made in relation to where next we take our RoboVC
Basically Venture Capital fails to consistently hit the ball out of the park because the investors in venture capital fail to back the talent capable of hitting the ball out of the park
As I have said elsewhere... The model we developed came to understand VCs and early stage investors as useful idiots rather than intelligent actors.
In retrospect it becomes self evident why this was the case… apparently, when it comes to raising pools of venture capital, only the useful idiots get funded
As I identified 10 years ago... The problem with venture capital - it's underlying design flaw - is very simple
VC is little more than 17th Century European aristocratic patronage wrapped up in 20th Century management speak
It is based on the flawed assumption that a managerial elite can out perform the free market in picking the next generation of winners
VC isn't the future. It's the (failed) past dressup as the future
A dysfunctional industrialised pipeline of cascading institutionalised patronage
Is there a paradigm shift in the air? A potential trigger for change?
Perhaps
While Europe's elite was knee deep funding the excesses of the Rococco England's free markets were banking on the industrial revolution to create a radical new vision of the future
Venture Capital labours under the illusion that innovation is a market contagion. The underlying mantra is I'll do what they are doing. They are by nature herd animals. Sheep dressed in wolves clothing.
What the investors in the Industrial Revolution discovered was they consistently hit the ball out of the park when they invested in emergent teams working on emergent products and services designed to monopolise emergent markets.
Suggesting, to thrive going forward, Venture Capital must become itself emergent... i.e. a marketplace for emergent capital
Which, when you think about it, is something of a paradox
Indicating the future of venture capital isn't venture capital... it's a free market
Or, as history would have it. The future must once again be disrupted by the past
But more about that another day...