It is a habit of mine to start the morning with daily tech news.
Ever since Sequoia capital introduced their now infamous “doom & gloom†presentation to their portfolio companies last October, the start-up world had been in turmoil. Enterprises are laying employees off like there is no tomorrow (e.g. Comverse, Orbotech etc.), start-up’s are running around snake bitten looking for an investment & the media is having a field day, generating ratings from unemployed people with nothing better to do other than reading the news.
Over the past few months I participated in different events focused on showcasing entrepreneurs to potential investors. Last week I participated in an event that was especially interesting. It was set up by the financial services company Brooks-Keret together with the Israeli chamber of commerce (here’s a link to some press coverage of the event). The goal behind the event was entrepreneur / investors speed dating. In a nutshell, each company had 15 minutes to showcase their idea, hoping that an investor would request a follow up meeting and learn more about the venture. That’s all. No due-diligence, no macro-economics state the market declarations, no promises. Just make an interesting presentation so that you get a follow up meeting.
It was during this event that I got the chance to have coffee and biscuits with some of the investors, some of them angels and some are VC executives. I was surprised to see the difference in the manner by which they evaluate companies.
VC’s are constantly looking for an exit strategy. They have an obligation to maximize their ROI in the shortest period of time. That is exactly the reason why they concentrate on the short run, instead of considering a business as just being a viable one. Angels, on the other hand, tend to look at businesses as a long-lasting money machine, and not just a pile of shares that might be worth something to someone one day. The main reason behind this is the fact that most angles are actually business persons that achieved success, and therefore know the nooks and crannies of creating something out of nothing.
If you take away the usual bladibidibla about how the recession is good for investors because they can now get better deals (more equity) for a cheaper price (as is often talked about in the media), you can actually make some sense out of it all. Market rules had changed.
In the aftermath of the global economic meltdown, almost everyone I talked to was telling entrepreneurs that they have to focus on making money. Since October, a “screw your vision†mentality had taken over the funding process. Investors kept saying to entrepreneurs that it’s time to leave the dreams aside and focus on cash flow. Cash is king. In a way, I agree.
The first problem that arises from this “screw your vision†mentality is that technological advancements and breakthrough concepts are being neglected. Good ideas don’t necessarily have a solid business model in mind when trying to change the world. I’m not saying that businesses don’t have to make money, of course they do. I’m just saying that sometimes the business comes after the idea, not the idea after the business. Take a look at Google as an example.
The second problem is that VC’s, being the major funding channel for start-up companies, are not necessarily looking for breakthrough ideas and technologies right now. They want to see a solid business model, preferably with some sales as topping, before even thinking about proceeding.
If that be the case, are VC’s lying when saying that they are always open to new ideas and are still investing? Well, in a way, yes. VC’s are not open to new ideas. They are open to new business opportunities. Good ideas are left for angel investors and dreamers.
