Sunday, October 15, 2006

VCs: The Myth of the Value Add

This weekend I came across yet another snarky post about the quality of Canadian VCs. They don't understand Web 2.0, they want too much control, they don't provide any value-add...yadda, yadda, yadda.

I get it. But while I think the points have merit, they are based on an outdated view of what venture capital in Canada is. Which is, pretty much what it's historically been - an asset class built on making long term, illiquid investments in businesses. To succeed in this asset class in Canada, you have to be a generalist. It is not important to understand Web 2.0, just how a Web 2.0 business fits the venture capital model of investment. If you happen upon a VC that has decided to focus on Web 2.0 and has developed his or her own investment thesis for that space, that's serendipity - it should not be an industry expectation.

The concept of venture capital as "value-add investing" has always struck me as marketing spin coined by VCs in more competitive times. It's a nice way of explaining why VCs expect to control your business for a period, and why it won't be too painful for you for you to let them. But why is control an unreasonable or surprising deal point? As a startup, you want their money, and until you manage to derisk your technology/business model/market opportunity, your VCs have no collateral to secure their investment. Some control over your business plan, spending and direction is appropriate; if your VCs are also helpful, that's just gravy.

As in every relationship, there is blame on both sides, and Canada's venture capital industry bears some responsibility for the disgruntled feelings in the startup community. At the height of the high tech boom, VCs recruited team members from outside the industry to help manage capacity. It is fair to say there was an adjustment period:

1. New VC recruits who were plucked from startups themselves often had a tough time adjusting to the role of investor, preferring instead to act as shadow CEOs and micro-managing an investment instead of providing oversight. This is when "hands-on approach" became a negative term.

2. Other newly-minted VCs, who did not have the connections to shoehorn themselves into deal syndicates, ended up saying yes to deals just to get into the game, leading to some breathtakingly quick flameouts (Take Riptide - in retrospect, an unfortunately on-point corporate name).

3. Finally, the sheer volume of venture capital that was available (and the pacing requirements of some funds) made many VCs look into market segments and businesses that simply did not fit venture capital's model. Because of this frenzied activity, there is still a lingering, misguided perception that venture capital is really startup capital that should be available for all new businesses.

Focusing complaints on what were the growing pains of venture capital is ignoring the broader issue: in future, where is Canada's startup capital going to come from? Venture capital in Canada is at a challenging stage. There are some who wonder aloud (after months of quiet whispering) whether it can succeed as a purely Canadian asset class in its current form. So enough, already. Show VCs a little love. Maybe even a disruptive technology or two.

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