Comments on: Fixing the Venture Capital Model http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/ Technology. Innovation. Science. VC. Media. :: by Eric Olson Thu, 20 Nov 2008 00:13:12 +0000 http://wordpress.org/?v=2.6.3 By: Automattic and Partial Founder Buyout : Olson’s Observations http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-39981 Automattic and Partial Founder Buyout : Olson’s Observations Wed, 14 Nov 2007 22:27:41 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-39981 [...] course a lot of folks, including myself, have talked about this type of situation but this may be one of the bigger instances it actually [...] [...] course a lot of folks, including myself, have talked about this type of situation but this may be one of the bigger instances it actually [...]

]]> By: FF Class Stock - Partial Founder Buyout is Alive : Olson’s Observations http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-3412 FF Class Stock - Partial Founder Buyout is Alive : Olson’s Observations Wed, 20 Dec 2006 18:59:38 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-3412 [...] I do think that there are clear benefits to investors especially in the new age of web start-ups where companies don’t need a lot, or any, outside capital to get things moving. The example I go to time and time again is Flickr. [...] [...] I do think that there are clear benefits to investors especially in the new age of web start-ups where companies don’t need a lot, or any, outside capital to get things moving. The example I go to time and time again is Flickr. [...]

]]> By: The Wannabe Venture Capitalist » The Founder Discount http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-1442 The Wannabe Venture Capitalist » The Founder Discount Wed, 11 Oct 2006 02:20:18 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-1442 [...] The latest podcast in Pascal Levensohn’s VC-IO entrepreneur series came out today and the subject matter was CEO compensation and the founder discount. Compensation in start-ups is something I am very interested in and, as long time readers know, I have talked about ways compensation could be structured differently to better align VCs with entrepreneurs (the previous link is to the first in a string of “fixing the VC model” posts). Little did I know that there was a man by the name of Noam Wasserman, Harvard Business School professor and blogger (I am now subscribed to his feed), who has done a lot of research in this area. [...] [...] The latest podcast in Pascal Levensohn’s VC-IO entrepreneur series came out today and the subject matter was CEO compensation and the founder discount. Compensation in start-ups is something I am very interested in and, as long time readers know, I have talked about ways compensation could be structured differently to better align VCs with entrepreneurs (the previous link is to the first in a string of “fixing the VC model” posts). Little did I know that there was a man by the name of Noam Wasserman, Harvard Business School professor and blogger (I am now subscribed to his feed), who has done a lot of research in this area. [...]

]]> By: Pat http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-325 Pat Fri, 14 Jul 2006 20:24:13 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-325 By providing a pfb it alleviates the stress of looking for your next paycheck and allows the founder to more fully develop the company for greater valuation long term. By providing a pfb it alleviates the stress of looking for your next paycheck and allows the founder to more fully develop the company for greater valuation long term.

]]> By: StartupFutures.com » Tim Oren: VC Disruption Part II http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-42 StartupFutures.com » Tim Oren: VC Disruption Part II Tue, 07 Mar 2006 01:47:35 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-42 [...] But, I wouldn’t start cheering if I were a software entrepreneur, though that’s been the tone of some of the posts I’ve read. A breakdown in the VC model suggests less demand for equity in the componentized software and services category. Meanwhile, lower entry costs suggest more supply than heretofore, which seems to be supported by the plethora of ‘Web 2.0′ tagged innovations floating around. This makes suggestions such as this one, that VCs will partially cash out entrepreneurs early just plain silly. That might happen if the supply/demand balance were strongly shifting the other way - it’s not. [...] [...] But, I wouldn’t start cheering if I were a software entrepreneur, though that’s been the tone of some of the posts I’ve read. A breakdown in the VC model suggests less demand for equity in the componentized software and services category. Meanwhile, lower entry costs suggest more supply than heretofore, which seems to be supported by the plethora of ‘Web 2.0′ tagged innovations floating around. This makes suggestions such as this one, that VCs will partially cash out entrepreneurs early just plain silly. That might happen if the supply/demand balance were strongly shifting the other way - it’s not. [...]

]]> By: Fixing the VC Industry: An Industry Ready to be Disrupted at Disruptive Thoughts http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-36 Fixing the VC Industry: An Industry Ready to be Disrupted at Disruptive Thoughts Thu, 26 Jan 2006 20:34:12 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-36 [...] Partial Founder Buyout. By letting the founders cash out early, VC’s can align attitudes towards risk between the founders and themselves. Paul Graham has an excellent essay on this. Eric Olson takes a central idea of Graham’s essay, allowing the founders to cash out, and provides a simplified explanation of the argument. The argument boils down to this: a founder would rather have a smaller return that’s guaranteed over a larger return that’s risky. [...] [...] Partial Founder Buyout. By letting the founders cash out early, VC’s can align attitudes towards risk between the founders and themselves. Paul Graham has an excellent essay on this. Eric Olson takes a central idea of Graham’s essay, allowing the founders to cash out, and provides a simplified explanation of the argument. The argument boils down to this: a founder would rather have a smaller return that’s guaranteed over a larger return that’s risky. [...]

]]> By: Eric http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-31 Eric Thu, 19 Jan 2006 03:36:00 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-31 Agreed. The control that should matter is more ownership of the company. Control over the entrepreneur should not be the goal of any investment/transaction. However, I don't doubt that there are some VCs out there who try to obtain that type of control and would resist partial founder buyout because of it. Agreed. The control that should matter is more ownership of the company. Control over the entrepreneur should not be the goal of any investment/transaction. However, I don’t doubt that there are some VCs out there who try to obtain that type of control and would resist partial founder buyout because of it.

]]> By: Adam http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-30 Adam Thu, 19 Jan 2006 00:12:00 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-30 Good thoughts on all counts. In terms of VC control... I agree that a VC who pays $3mm to a founder gains more control in terms of % ownership of the company. However, that VC may also be losing "control" (power) over the founder who now has $3mm in the bank and is no longer as desperate. The control that <B>should</B> matter is the additional company ownership, not the "control" over the founder. I'm just not sure many VCs see it that way. That's why I think part of their issue with partial owner buyout is "control". If/when more companies start exiting early because it's the safer way out, VCs may have to begin using ideas like this to entice more startups to stick around for the long run. Good thoughts on all counts. In terms of VC control…

I agree that a VC who pays $3mm to a founder gains more control in terms of % ownership of the company. However, that VC may also be losing “control” (power) over the founder who now has $3mm in the bank and is no longer as desperate. The control that should matter is the additional company ownership, not the “control” over the founder. I’m just not sure many VCs see it that way. That’s why I think part of their issue with partial owner buyout is “control”.

If/when more companies start exiting early because it’s the safer way out, VCs may have to begin using ideas like this to entice more startups to stick around for the long run.

]]> By: Eric http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-29 Eric Wed, 18 Jan 2006 15:03:00 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-29 Great points Adam. I think you are absolutely right that VCs will consider the points you outline. I don't think that VCs would lose any control because the extra $3mm (in this case) would buy them more of the company. However, the argument that $3mm could be put to better use growing the company is a strong one. I would argue that giving entrepreneurs a safety net would take away much of their desire to sell early and would keep them focused on the long term ultimately giving VCs better returns. I also can't/won't blame Flickr for what they did. I probably would have done the same. Hopefully VCs will start to look at ways to change the model for the better even though they really don't have to. If they do something, companies like Flickr will go for it and most likely yield large returns for them. Great points Adam. I think you are absolutely right that VCs will consider the points you outline. I don’t think that VCs would lose any control because the extra $3mm (in this case) would buy them more of the company. However, the argument that $3mm could be put to better use growing the company is a strong one.

I would argue that giving entrepreneurs a safety net would take away much of their desire to sell early and would keep them focused on the long term ultimately giving VCs better returns.

I also can’t/won’t blame Flickr for what they did. I probably would have done the same. Hopefully VCs will start to look at ways to change the model for the better even though they really don’t have to. If they do something, companies like Flickr will go for it and most likely yield large returns for them.

]]> By: Adam http://www.ericjohnolson.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-28 Adam Wed, 18 Jan 2006 02:03:00 +0000 http://www.ventureweek.com/blog/2006/01/15/fixing-the-venture-capital-model/#comment-28 Excellent post. I agree that this is a great topic for VentureWeek. I see two important points that VCs will probably consider: 1. Control. Many VCs may believe they'll lose some control/power once they provide the founders with a $3mm safety net. 2. Company growth. $3mm may be better off growing the company instead of sitting in the bank. As an entrepreneur in the Web 2.0 space, I can definitely see how partial founder buyout aligns the interests of both parties. However, it doesn't seem to be an idea that VCs are quite ready to adopt. I can't really blame Flickr for what they did. Excellent post. I agree that this is a great topic for VentureWeek.

I see two important points that VCs will probably consider:

1. Control. Many VCs may believe they’ll lose some control/power once they provide the founders with a $3mm safety net.

2. Company growth. $3mm may be better off growing the company instead of sitting in the bank.

As an entrepreneur in the Web 2.0 space, I can definitely see how partial founder buyout aligns the interests of both parties. However, it doesn’t seem to be an idea that VCs are quite ready to adopt.

I can’t really blame Flickr for what they did.

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