Olson's Observations

Reading time: 5 – 8 minutes

Talk about secondary markets for private company stock has been heating up recently but the thought has been around for quite some time.  In fact I, along with others, wrote about secondary markets for private company stock in 2007 and 2008 and I am certain that the argument goes much further back than 2007 since the idea is essentially low hanging fruit.

Why is talk about secondary markets heating up now?

It seems the secondary market idea, as expected, tends to come back every time startups (and venture investors) have very few exit possibilities.  As of late things have been looking very grim with regard to exits.

The public markets have been virtually shut down in terms of startup IPOs for some time now.  In fact, I saw some numbers (via the NVCA) the other day that showed how bad the IPO market has become.  There were roughly 86 VC backed IPOs in 2007, 6 (yes, that’s a single digit) in 2008 and 0 thus far in 2009 (goose egg).

OK, so what about M&A activity?  From 2004 to 2008 M&A activity has hovered around 350ish VC backed M&A exits per year or about 87 M&A exits per quarter.  Q1 of 2009 saw only 56.  You may think that that number isn’t too far off the average but when it comes to the average size of M&A exits over time the picture becomes clearer.

In 2007 the average M&A deal size was $177mm.  2008 saw a decline to $115.7.  2009, thus far, comes in at a whopping $49.6mm average M&A deal size for VC backed startups.  Ouch!

Where else can we (entrepreneurs and VCs) get liquidity?

That’s certainly a loaded question but one that needs to be taken seriously and addressed.  Why? Well, if liquidity events are rare then VCs won’t make many investments and, therefore, startups will become more rare and, thus, a vicious cycle ensues that severely impacts our economy (especially given that VC backed startups are a large job creation engine for this country).

This is how we get to the idea of secondary markets.  Secondary markets exist for many illiquid assets at this time.  In fact, secondary markets even exist for Venture Capital fund positions (i.e. LPs can sell of their VC investments in a secondary market).

I have to admit that I do find the idea of secondary markets for VC backed (and non-VC backed startups) intriguing but I am starting to see some issues with the whole concept.  That said, before I get into some of the issues I would like to chat quickly about a pain in the butt accounting rule that may actually help to enable secondary markets for private company stock to function.

FAS 157

A lot has been written about FAS 157 and how terrible the rule is. Even FASB didn’t like the first version of the rule they released.  That said what FAS 157 does, in part, is force VCs to value their investments each quarter.  Since this is a giant hassle (for reasons I may take a whole other post to describe – on second thought that would just be tortuous for you and I so I will skip that post) a lot of valuation firms have been springing up to help VCs and other funds (PE, hedge funds, etc.) value their investments.

As a by product of this rule lots of data is being generated on private companies and the valuations over time.  This data could potentially form the backbone of a secondary market for private company stock (i.e. these valuations could be likened to the analyst reports for public companies and the secondary market participants would then go ahead setting the price for the private company stock).

Wow, this sounds great! What could possibly be wrong with a secondary market for private companies?

This is, again, quite a question.  One of my big concerns about a secondary market for private companies was something I initially missed in my thinking about them.  The issue is this:

If private companies begin to be traded on a secondary market and, through FAS 157, are valued regularly, what stops private companies from focusing on the short term (i.e. short term value of the company, etc.) just like publicly traded companies do (to their detriment it seems)?

One thing that is great about startups is that by nature they take the long view.  Startups try to create long term value and they tend not to worry about short term valuations of their stock or short term revenue opportunities.

If a secondary market begins to take that long term thinking away by pushing companies to focus short term doesn’t a private company simply become a defacto public company albeit with less regulation imposed on it?  I think it may.

Some other issues that come up are equally large.  In the words of Fred Wilson:

I understand that there are issues with this development. It will be harder to strike options at low prices when the company’s stock has a price history. It will be harder to control who the shareholders are and it will be harder to keep employees motivated to stick around if they can cash out early. These are all problems companies usually don’t face until they go public. Now they will have to face them earlier.

The issue that is that heart of the couple Fred mentions is continuity.  One reason startups are able to take the long view is that they generally have a stable management team and a stable group of investors/board members. Part of the stability of startups lies in the fact that everyone is in it together for the long term so-to-speak since they can’t liquidate their positions easily. If founders, investors, board members and employees can suddenly liquidate their stock fairly easily what is left to keep them around?

If you can’t keep your people around then you need to bring in new people. Now you’ve lost time and continuity, which is bad enough but you are also going to have a hard time setting option strike prices at a rate that give the potential new employees good upside potential.

In my mind, there is enough to worry about in an early stage startup without having to worry about a lot of the things startups have to worry about only when they go public.  It seems that adding more issues to the mix will potentially decrease the success rate of startups.

In conclusion

Fred and others (VCs and entrepreneurs alike) are fans of the secondary market idea even though they see the issues that come about. Even I can’t say that I am not, at some level, a fan of the idea (we need something that allows for liquidity).  It just seems to me that these secondary markets need to be well thought out so we don’t lose the long term thinking and alignment of interests that are both big parts of the world of startups and necessary for continued innovation and economic growth.

Reading time: 5 – 8 minutes

Dan Primack of PE Hub passes along an idea on how to revolutionize venture capital in his latest post. The idea, given to him from an unnamed Boston based VC, centers around the partner as the core of the VC fund.  Partners have always been the core of a VC fund, right?  Right.  However, in this new model Primack suggests there aren’t really any partners to speak of.  Each “partner” would work on his or her own with his or her own pool of money provided by one (or perhaps more) LPs.

The analogy Primack uses to explain this new idea is that of a professional athlete.  VCs have been compared to professional athletes for a long time due to a number of similarities with both professions. In this case the similarity we’ll focus on is that VCs, like professional athletes, usually work in teams but are judged on their individual numbers.

The issue with teams both in sports and in the VC world is that the stars can get pulled down by poor team members.  So, the thought is, why can’t a star VC just go “one-on-one” and raise an evergreen fund  from one LP (or perhaps more) that only he or she will manage.  These star VCs can then sign contracts with their LPs  (3 – 5 years to start was what was suggested), take a salary of $1mm per year, get 15% of any carry and hire an assistant and an associate.

It is suggested that this new venture capital model would provide better returns for LPs if the star VCs remained stars and, even if those VCs dropped off, the LPs would lose less then they would have if they picked a losing fund with multiple team members.

Primack, of course, realizes there are some issues with this idea and lists them in his post.  Two of them caught my eye:

1. What about the fact that the partnership model encourages working together to figure out if the deals a firm is looking at are really the best deals? Partners, in theory, should be helpful in that they may have different points of view about a deal that the deal-leading partner didn’t think of, etc., etc.

Primack refutes this by saying that most modern partnerships operate within a quid pro quo of silence. i.e. Don’t knock my deal and I won’t knock yours.  I haven’t been involved in any funds other than DFJ Portage and we operate in a very collegial way and speak our minds freely. That said, I actually haven’t seen Primack’s argument in reality although I could see his argument being the case at larger funds.

2. Would LPs be able to pick the right individual VCs?

That’s a big question but if an LP is on top of the goings on of their VC funds they probably already know who the superstars in their funds are.

I think the bigger question really is: Would the superstars consistently perform?

I don’t have the data on this but I know my friends at Cambridge Associates do so perhaps they can carry out this proposed study for me (hint, hint).

My idea for a study is to look at data from as far back as one can until the present day and then use the data to figure out if superstars are consistent over a long period of time or if the superstars during one 5 – 10 period are the dogs of the next. My guess: they aren’t consistent over long periods of time.

I fixate on this particular issue for one main reason and that is the fact that even the biggest of the big name VC funds – the blue chips as it were – are inconsistent in their returns.  Some of a given firms’ funds are top quartile and others are bottom quartile and some are in between.

A number of the big guys have fund returns that look like a roller coaster and it makes me think that the superstars would not fare much better.

Another point along the same line of thinking is that the superstar VC may actually be a superstar due to his or her team.  This point is also highly correlated to the entrepreneurs VCs back in that the team (the entrepreneurs plus the folks they hire) is everything.  Entrepreneurs have to be great leaders but they also need to hire great teams around them if they intend on bringing their companies to the highest level. Venture capitalists may also need their teams to help the VCs perform at the highest level possible.

With all that said it seems to me that trying to move the industry as a whole to the individual model or the partnership model doesn’t make much sense.  What works will differ based on the individual.  Some folks work well alone, some with a team, and so on and so forth.  What we, as an industry, probably need to address is the following:

Too much money has been flowing into VC for a while now.

Because of this fact funds are too big to do what VC is supposed to do.  $100mm or less (maybe a little more in some cases) is probably a good size fund for true seed and early stage investing.  Venture capital just doesn’t scale well and perhaps we need to accept this as an industry.  This is an important point and one that still needs to be addressed.

I am continually thinking about how to improve venture capital because I think venture capital is vital to the creation of great companies and life improving technologies. It has become fashionable to argue otherwise and I am actually happy about that.  I relish the posts about the death of venture capital.  Why? Well, because I try to look at those posts as a challenge for us, the VCs, to do better.  We can always do better.

Perhaps this superstar VC idea isn’t the way to improve venture capital (although some folks could try the model as it may work for some) but I am sure that through all of the discourse we will have as an industry in the coming years we’ll figure out of a few things that will make venture capital better at doing what it is supposed to do: find and fund bright entrepreneurs and then help them to create the next generation of new technology companies that will move the human race forward (while also generating a great return for our LPs of course).

Reading time: 4 – 6 minutes

Umair Haque opened up a thread on his HBR site back in August (yup, I am a little late to the game on this one but I think it is still very relevant) entitled “Overinnovation”.

His main argument: innovation and sustainability are at odds (or are they).

He suggests this is something to chew on and I agree.  That statement is one that I am sure could spur debate for weeks, months and even years but I’ll simply talk about it for about 700 words or so.

Here is the premise in Haque’s words:

Innovation is premised on force-feeding people more junk; on fueling artificial needs for super-size meals, Hummers, and a new pair of sweatshop-produced fast-fashion jeans every weekend.

Sustainability, on the other hand, is premised on helping people finally step off that creaking treadmill of consumption.

Is sustainability the long-overdue nemesis of the innovation fever that’s gripped boardrooms for the last decade – and led to a banal consumptionscape of gewgaw-filled warehouses littering asset-stripped suburbs? Conversely, is sustainability just a crutch for players – like Wal-Mart -can’t innovate in the first place?

Or can sustainability drive a better kind of innovation?

(Some of the comments on his post are fantastic so I highly suggest reading them.)

I think Haque is a bit harsh in his description of innovation as “force-feeding people more junk” (although some innovations do lead to that conclusion).  I think, when done well, innovation looks to do something better, more efficiently and more inexpensively than it was done before and those things, generally, sit well with sustainability.

One of the commenters suggested that what Haque really should have used for terminology was bad-capitalism versus good-capitalism.  I believe what the commenter meant by this was simply that innovation and sustainability should never be at odds when compensation and motivations are pointed toward the larger good, as they should be.  This is probably true and it suggests that innovation isn’t at odds with sustainability at all.  In fact, innovation should drive sustainability when practiced in a system that values the right things.

It really comes down to what people value.

We are starting to see innovation and sustainability come into closer alignment as people begin to realize that our current system can’t work forever. Consumerism is simply unsustainable.

Due to this shift in consumer’s values we have seen a lot of innovative business models emerge. In fact, while they are innovative, some of them just seem, well, pretty basic.

One of the most interesting models to emerge is to turn a product into a service.  This model has been best employed by larger product based companies looking to provide a more sustainable service to their customers and it yields a recurring revenue stream to the business, which is a nice bonus.  The idea can be summed up in this example:

Say you are Carrier and you make air conditioning units.  When you make these A/Cs you aren’t incentivised to make an A/C that lasts forever.  If you did that than a customer would buy once and never buy again and that doesn’t make for a long lasting business.  So what you do is you build an inexpensive A/C that will break after a certain number of years so that the consumer will have to come buy a new A/C on a fairly regular basis. (In fact, it is known that some product companies actually do design in failure points for their products to ensure consumers need to continually repurchase.)

With the innovative move-a-product-to-a-service model Carrier would charge their customers for “air conditioning services” where they would sign a contract with the customer that stated Carrier would keep the customers air at X degrees Fahrenheit for $X per year, month, etc. Now that the cost of of the actual A/C unit (and the power to operate it) falls to Carrier they are incentivised to build the longest lasting most energy efficient A/C they can in order to lower their cost to provide the air conditioning service to their customers.

The longer lasting more efficient A/Cs are better for everyone since Carrier ends up with a nice recurring revenue stream, the customer can focus on their business and not their air conditioning units and the environment ends up with fewer broken A/Cs in landfills and less toxic freon floating around.

At the end of the day, when incentives are aligned properly, innovation and sustainbility should walk hand in hand.  They should never be at odds and, if they ever are, there are probably higher level systemic things that need changing.

Reading time: 2 – 4 minutes

Following on from Haque’s theme of organization as the next industrial revolution (that I wrote about a couple days ago) comes the story of txteagle, an innovative company I learned about this morning via an article in Technology Review.

As a lot of you know, using mobile phones to accomplish tasks in developing countries around the world, most notably the sending and receiving of money, has become more prevalent. This is due to the fact that developing nations have jumped right from no phones to cell phones and, since the phones are very affordable, a lot of people own them (billions of people actually).

txteagle is a new company looking to leverage the mobile phone to provide a conduit into developing nations for businesses that need certain tasks, like translating text and transcribing audio, completed.  txteagle realized a while back that companies pay people good money to accomplish these millions of text based tasks but companies haven’t really ever tapped developing nations to help with this kind of work. This is partly due to the fact that people in developing nations can be spread out and hard to reach.  This is where txteagle’s product comes in.

txteagle has built a system that can distribute text based tasks, such as translating a passage or transcribing an audio clip, to mobile phone users in developing nations via text messages.  Since there are over 1.5 billion literate mobile phone subscribers in the developing world and because text messaging is a very basic phone feature (meaning most every phone has the capability) txteagle has a large network to tap.

Folks who receive text messages from txteagle and complete the tasks asked of them can typically earn the equivalent of about $3 per hour for their work.  While this may not seem like a lot to us what you need to consider is that most of the people txteagle “hires” actually make less than $3 per day.  Also, the $3 per hour rate that txteagle pays, while being great for the “employees”, is also great for the company paying to have the work done. How great? The $3 per hour rate is about 60% less than current transcription rates.

txteagle is a great example of organizing a group of people in a different way to form a business that creates profits for the business and a less expensive service for customers while also creating a better life for the people who actually do the work.  I am sure we’ll see more of these innovative organization based ideas come about and I am excited to see how they will create a better world for all of us.

Reading time: 2 – 4 minutes

Commercializing innovation is one of my biggest passions.  It is what gets me up in the morning and I am glad I get to do it for a living as a VC and, previous to that, as an operator in a startup.  That said, I have to admit that what surprised me a little when I moved to the VC side and started working with a lot more professors and graduate students was that some of these folks didn’t seem that interested in pursuing commercialization of their innovations (to be clear there are also a lot of them that do think a lot about commercialization).

I totally understand where they are coming from.  They aren’t in it for the money.  They simply want to make the world a better place.  I am 100% with them on that.  I don’t do what I do for the money either.  I doubt someone can be very happy for very long doing something only for the money.  A higher mission is usually what drives people to new heights.

However, it seems that these folks don’t realize that working to commercialize their innovations can actually help get their innovations out into the world and helping people, which was the reason they spent their time and effort developing the innovation in the first place.

In fact, I heard from a professor today that another professor mentioned that, in his view, his work, in the form of an academic paper, may take 20 years to have any effect on society but when commercialized it could probably reach people in a meaningful way in a couple of years.

While businesses and corporations can be evil there is no reason they have to be.  In fact, if done right, businesses are really great vehicles for disseminating innovations to the public and doing it in a sustainable way (since they make money – and profits – and can use those to continue the business).  Not only that but they also lead to even more economic good for a region in terms of new, and generally higher paying, jobs among other benefits.

I view part of my role as a VC as spreading the message of commercialization and helping scientists to get to the point where their innovations can become a sustainable business and subsequently start improving peoples lives.  Sure, sometimes the innovations are years away from being commercialization ready but so what?  Working with these guys and seeing their innovations progress over time is a big part of the fun of being a VC (in my view at least).  Plus, it lets me put my inner scientist/engineer to work (let’s face it – I think most business side startup guys and VCs are really wannabe engineers and scientists are heart).

Commercializing innovation takes a lot of work but it is worth it. I look forward to my continued work with some of the brightest and most resourceful innovators around and I think we’re going to build some groundbreaking companies together in the years to come.

Reading time: 5 – 8 minutes

I have begun to read Umair Haque more and more lately.  Haque’s writings have done a few things for me:

1. Reminded me why I love to write and share my ideas.
2. Challenged me to think differently and more critically about the current state of the economy and of business in general.
3. Fired me up about the possibilities for the future.

As all of you know, I love innovation.  I particularly love innovation in technology but I also love innovation in business models, management styles, organizational structures, etc.  I love pushing the boundaries of what is possible and challenging assumptions and commonly held beliefs.

Recently I read a post by Haque that got me thinking.  The post was entitled, “A Manifesto for the Next Industrial Revolution“, and in the post Haque does a great job at assessing where things are and then follows on with what he thinks the future looks like.

Haque suggests that the future of, say, finance, isn’t simply getting more money to lend, it is about organizing the system better.  Haque uses the example of Muhammad Yunus and the Grameen Bank to illustrate this point.  Yunus didn’t simply get some money together to loan to the folks at the bottom of the pyramid, he changed the way lending worked by organizing the lendees into groups that would create necessary lendee payback discipline via peer pressure (this was much needed since there was no collateral available to back the loans) in order to keep payback rates high, which, in turn, made the whole Grameen system sustainable and able to help many more people.

Haque thinks that organizing things is where the innovation that will fuel the next industrial revolution will come from and I don’t think he is far off.

Google is probably one of the most shining examples of the organizing phenomenon.  Their mission is to organize the world’s information and, in doing so, they revolutionized the advertising industry while making it more efficient.  This of course let to incredible growth and huge profits for Google.

Some other examples include Threadless (organizing a group of t-shirt designers and t-shirt buyers who create and buy the shirts rather than Threadless trying to guess at what people might want) and Etsy (organizing production of handmade goods into one place).  Both of these websites list in my top ten and both are centered around organizing and enabling people to choose and create what they want rather than trying to guess at what people may want, mass produce that product and then jam it down people’s throats until the inventory is sold.

What is interesting about both Threadless and Etsy to me is that at a high level they really created marketplaces and marketplaces aren’t new at all.  Perhaps rather than using the term organize we should really use the term market.  Creating markets where people can interact and exchange ideas, goods and services are inherently valuable.  The trick is trying to figure out where the business who facilitates the market can extract the value that will keep the organization and its market up and running.

With Etsy and Threadless the value extraction is fairly simple in that goods are sold to people who pay for them and the companies make a profit (Etsy from fees from the sellers and Threadless through the sales of the t-shirts).  Selling goods is a clear cut way to extract value but perhaps there are other innovative ways to extract value from a market in other industries.

Haque throws out some more things that need organizing including the world’s hunger, energy, thirst, health, finance and education.  All of these are industries that need fresh ideas and new blood and are perhaps areas in which businesses that organize can thrive.

I personally get fired up about innovating in the financial space since I have always been a fan of the financial markets but also realize that they are in dire need of innovation.  What ideas do you all have for a business that organizes things in a way that benefits the business and the financial industry? How do you think the theme of markets and organization can help with the other areas Haque mentions?  I am curious to hear your thoughts and I hope this idea of organization as a means of change and innovation inspires you as much as it has inspired me.

Midwest side note: I see organization as a part of the solution around making the Midwest into the technology hub is really should be.  I find that a lot of people around the Midwest don’t know what other folks are doing and that lack of information really stalls innovation here.

Think of the issue in comparison to Silicon Valley.  In the Valley there are a number of events, meetups, etc. that you can attend in any given night.  This allows for great networking and fantastic visibility into what is going on in the area.  This visibility really helps people to collaborate on things, find talent for their business, get the funding they need and many other things.

The idea of organization as a means to innovate and create value is exactly what Frank and I had in mind when we created TECH cocktail.  We believed, and still believe, that organizing technology focused people in the area would lay the ground work for some amazing change to happen here in the Midwest and we’re starting to see the idea become reality.

We’re going to continue on with our organizing mission by working on events in each of the Midwest cities (i.e. Ann Arbor, Madison, etc.), which will be added the current roster of Chicago, Champaign, D.C. and Boulder.  The intent here is to organize the local communities and then to bring all of the Midwest communities (and some other select communities) together once or twice a year so that everyone from the Midwestcan start a regular dialog with one another.

When combined the Midwest is much more, and will be much more, than the sum of its parts and we hope to be the folks that organize and, therefore, catalyze the technology innovation here in the Midwest.

Reading time: 6 – 10 minutes

I have to admit that Umair Haque’s recent two part series of posts on venture capital really made me want to start writing on this blog again.  His posts, entitled “Asleep at the Wheel of Creative Destruction” and “Five Problems Venture Capitalists Should Have Solved (But Didn’t)” really got me thinking.  In the words of my friend and partner in TECH cocktail crime, Frank Gruber, Haque got me “fired up!”

At a high level Haque is calling for VCs to step up their game and push innovation forward rather than sitting back, like some have been, and making a lot of “me too” investments that, even if they play out, don’t really move the needle much for the world in terms of meaningful change, job creation, etc. Here, here! I am with him 100% on changing the world for the better.  That’s why a lot of us got into VC and entrepreneurship in the first place.

I agree with Haque on a number of the points in the “Asleep at the Wheel” piece.  It certainly seems that the VC industry is flooded with too much capital looking for homes that don’t exist (however, some places, the Midwest for example, don’t have nearly enough capital to fund the great entrepreneurs, ideas and technologies they have) and that, as Haque puts it, a culture of imitation, rather than innovation, has started to permeate venture capital.  I also agree that “transparency, disclosure and discussion” can help venture capital by allowing it to become more participative and open.

Haque closes “Asleep at the Wheel” with this statement:

Unfortunately, today’s venture investors are about as interested in reform as yesterday’s bankers were. So it just might take a venture crash – just like Wall St’s financial crash – to wake up the guys and gals asleep at the wheel of creative destruction.

Ouch!  He may be right about some folks but, as long time readers know, I have been a big fan of innovation in the VC business for some time now (and have written about some innovative ideas in detail) and there are many other forward thinking VCs that are interested in improving their business too.

That said, we need to figure out a way to innovate that can also provide great returns for our investors.  One of the main issues is that we hold illiquid investments for a relatively long period of time before we can either sell them or, hold on to your hats people, IPO them (haven’t seen one of those in a while).  Once we put money into a company the clock starts ticking and, when the investment is finally exited, that clock allows VCs and their investors to calculate the efficiency or quality of an investment, which comes in the form of an IRR or Internal Rate of Return.

The IRR allows different investments to be compared to each other directly to help asses if the VC investment was a good one as compraed to, say, putting money in an S&P 500 index fund (i.e. just because you received 5x your money, for example, doesn’t mean the investment was the best one you could have made – the time your money was locked up in that investment needs to factor in).  Here is an example:

Say you invest $1,000,000 in a startup right now and you get $10,000,000 back at some point.  Either way you look at it you got 10 times your money back.  A huge home run right?  Not necessarily.  Let’s take a look at your IRRs at different periods of elapsed time:

$10,000,000 returned at 5 years: IRR = 58%

$10,000,000 returned at 10 years: IRR = 26%

$10,000,000 returned at 15 years: IRR = 17%

$10,000,000 returned at 20 years: IRR = 12%

Interesting isn’t it.  You wouldn’t have done much better than the long term market return if you couldn’t exit your deal before 20 years of hold time.  That means, at 20 years, you and your investors didn’t get a great return especially considering that, generally, the startup you invested in was inherently more risky than the overall market and, therefore, should have had a far better return than the market to account for the excess risk you took (more risk needs to equal more return to make things work – see alpha).

This is why VCs have specific hold time targets (usually about 5 -7 years and sometimes less) and limit their funds’ life to 10 years (if you have to hold investments longer than that the IRRs, even at 10x your money, start to degrade and the folks investing in your VC fund become unhappy).

The folks that invest in venture capital funds (i.e. the big institutions) want returns that make it worth the risk they took and those returns are affected by investment hold time.  Some of the things that Haque suggests VCs should have fixed or innovated on and the markets we should have created don’t appear to have the profiles that would make for good investment where good equals what LPs want in terms of IRRs.  Therefore, even if VCs did dive into this harder-to-solve stuff they may have done a lot of good but the returns may not have been there and, thus, these VCs would not be able to raise a new fund and continue to innovate since their investors would have been unhappy.

Bottom line: if the VC business wants to start moving in the direction of some of the issues Haque puts forth and suggests VCs should have solved than VCs need to figure out how to get the returns their investors demand while pushing forward on harder to solve problems.

At the end of the day venture capital still needs to be sustainable and that means driving good returns to LPs. Good returns enable VCs to continue to raise new money to invest in innovate young companies and to perpetuate the innovation the cycle.  Returns are our constraint as VCs and we need to find creative ways to work within that constraint while still taking on the big risks that help to create new industries and completely revitalize old industries.

This is the challenge and it is a big one but one that will be exciting to work on.

At the end of Haque’s “Five Problems Post” he suggests that if VCs can’t solve problems like:

• Reinventing communications
• Reconceiving capital markets
• Business models for public goods
• Business models for radical responsibility
• Discovering new sources of advantage

than VCs are obsolete.  In fact, he says VCs are obsolete as of right now since we didn’t solve those issues.  I am not sure that he correct when he says that and I do think he trivializes the issues the VC business faces by ignoring the fact that VCs do need to provide returns that make sense to their investors.

However, I tend to look at Haque’s two recent posts as inspiration.  He’s right.  VCs can do better and VCs need to continue to strive to do better and to foster meaningful innovation.

I am not sure what the answers are in terms of working to reshape the VC business into one that address what Haque suggests VCs should be addressing. That said, I am willing to investigate the issues and to try to find some solutions that can get venture capital to the next level and I am sure many others are as well.  I am really glad that Haque and others continue to challenge the VC business.  It is too easy to become complacent and posts like Haque’s can really kick people into gear.

If a number of people heed Haque’s call some really exciting new ideas, businesses and industries will no doubt emerge and we (VCs and entrepreneurs) will continue to be able to combat the world’s largest, and most nagging, issues.