Disqus - Latest Comments for mridenour

Re: Is it time for the venture capital “two-and-twenty” to end?

mridenour — Tue, 01 Sep 2009 11:46:31 -0000

First, I completely agree that the venture model is broken. I also agree that large funds cause most of the problem and huge fees are the big incentive to raise large funds. HOWEVER, wholesale implementation of lower fees as "standard" would actually make part of the VC problem even worse.

One of the biggest challenges facing start-ups today is a lack of seed and early stage funding. Part of the reason for this is that institutional investors no longer back early stage funds (which is strange since they've always had the best returns - but that is different story). Part of the reason is that it is not economically practical to operate a small fund on 2% fees. Let's assume that the perfect size fund for first round investments is $20mm. The annual fees for this fund would be $400,000. Many would argue that it actually takes more staff in a small fund than a large one (because early stage companies generally have more challenges). So, running this size fund with 2-3 partners, a few associates and an office is simply not possible.

My view (which is extremely unpopular in VC world) is that compensation should actually be tied to PERFORMANCE. Institutional investors should negotiate a maximum base salary with GPs (like investors do with CEOs!) and the carried interest should represent the upside (like a CEO's stock options). I think this change would go a long way to resetting the industry as the best GPs might start migrating back to early stage deals where the upside has always been much greater, rather than getting fat and happy with management fees.

Re: The VC model is broken

mridenour — Thu, 13 Nov 2008 13:59:20 -0000

I agree very much with the overall theme of this presentation and commentary, VC is "broken". However, I strongly disagree with the conclusion that we actually need fewer, "better" VCs. In my view, part of the reason that VC performance has become so stale is that the compensation system for venture capitalists drives them ever upward in terms of fund size. If they have success with a "small" fund they will raise a larger one.

A friend just recently closed a $250mm fund after being part of several smaller funds. Over dinner his comments to me were essentially that the partnership did not actually expect they would make returns in this new, larger fund. But, on the other hand, the 3 partners would be splitting over $8mm per year in fees between the various funds. He is activity investing in real estate on the side. Have any of you ever met a VC partner that wasn't "rich"? The data would indicate that the majority of these people are not making money for their investors?

In general, I believe it is much harder to make good returns with larger funds. If a company is raising $50mm there will be intense competition by investors trying to get money to work. On the other hand, in today's environment, if a company needs $3mm they are dead in the water no matter how good the company and deal. So few investors are doing those deals. For a fund group with $500mm under management a 10X return on a $3mm investment just doesn't "move the needle" and it isn't worth the hassle.

So, I think the right answer is that the groups that invest in funds need to think hard about sponsoring the next generation of fund managers. We need to create 10 $50mm funds for every one $500mm fund. I know this will be difficult because pension funds are massive and it is tough to deploy into small funds. But, if we don't somehow restart the "farm team" system I fear the end of venture capital is not far off.

Re: Is The Business Plan Dead?

mridenour — Mon, 14 Jul 2008 13:01:06 -0000

Hey,

I just came across your link to our Momentum Website and blog . As you note, I certainly suggest that you don't send a business plan to an investor and, more strongly, suggest that you don't write one. Some people, like some of the folks who have commented below, seem to mistake this point of view for advice not to "plan". That isn't what I'm saying - I'm simply saying that the traditional business plan, for a start-up, is not dynamic enough to be useful.

In terms of fundraising, I've raised VC financing at least a dozen times and I've also invested as a VC. I've also raised funds from angels groups such as Tech Coast Angels and Pasadena Angels. I can honestly say that I have only been asked for a "business plan" once or twice (on both occasions by angel investors) and even on those occasions I wasn't pressed once I shared an alternative approach to planning.

In terms of planning the business, I challenge any entrepreneur who has succeeded to convince me that their business plan was really a living, useful document. Often, there may be a plan that someone nostalgically pulls from a shelf years later -- generally for a good laugh. Start-ups change almost daily and much like early financial models, start-up business plans have more "wrong than right" inside of them. If someone sincerely wanted a start-up business plan to be dynamic they would have to be updated almost weekly - and then they would really just be more a document for recording history than a planning tool.

I want to observe blog etiquette and limit the length of this note. I do think planning is important and I think there are several dynamic tools that are useful for both running a company and raising funds. There is a pdf document on our website that is attached to the blog "why you shouldn't write a business plan" that you might find useful.

Thanks for the link here - and best of luck to you all!

Matt Ridenour