How should a VC really look?

How should a VC really look?

Following on from my post yesterday:

Another fucking tech Fund

Seems like I have hit upon something. Anyway as many of you know we are looking to create a VC but the current models do not seem to fit with how my mind works. I do not come from a finance world so maybe my ideas are mad. But here goes:

When a VC invests in a company they are looking for a return in a certain period of time, normally this is something they have told their LP’s ( investors ), but how can they know what the returns will be and how long the returns will take to materialise? Historically almost all VC’s, especially in Europe, have awful returns for investors, but people keep following the same old model and expecting different results? This is a common sign of madness.

Complete_Madness

Ok lets look at this a different way:

  1. As an investor in a fund I want to feel secure that I will get a certain return over a certain time period.
  2. As an investor in a fund I want to know I can trade my investments if I need to in an emergency.
  3. As a founder I want to know I can run a company how I want, maybe I will sell the company, maybe I will sell some of it or maybe I will keep it and collect the profits.
  4. As a fund I want to know that I make returns in all scenarios.
  5. As a partner of a fund I want to be fairly paid for my time, but I also want to be rewarded well on any significant upside.

So now I think we have the wants of ALL parties, let us see if we can address then individually and come up with a common solution:

  1. As an investor in a fund I want to feel secure that I will get a certain return over a certain time period – The best way I can think of this happening especially at early stage investing is to effectively be a tracker type fund and have exposure to almost everything. Thus a 500 startups, Y Combinator, Techstars, Kima Ventures type model.
  2. As an investor in a fund I want to know I can trade my investments if I need to in an emergency – As no true market is available then the stock in startups is illiquid, but maybe we could have a solution whereby founders or existing investors could buy another share holders stock at an agreed discount.
  3. As a founder I want to know I can run a company how I want, maybe I will sell the company, maybe I will some of it or maybe I will keep it and collect the profits – To keep doing mad stuff , the founder needs to keep control. Thus I need to have investors who are rewarded for me exiting the business partially or completely, but also are rewarded if I keep the business and make it profitable.
  4. As a fund I want to know that I make returns in all scenarios – I need to mitigate my cash loss if a company fails ( this can be done by using some preference stock and also by utilising SEIS/EIS tax breaks in the UK ). As discussed above a fund can make a return from profits. If a company is sold then the fund get rewarded in the normal manner.
  5. As a partner of a fund I want to be fairly paid for my time, but I also want to be rewarded well on any significant upside – Have agreed fees that are based on true costs and not a 2% of money under management, but if a fund performs well have tiered uplift deals so that partners can be massively rewarded for exceptional returns.

This is still all up for discussion, so please email, tweet us etc etc etc. But surely the traditional model of VC is just stupid and does not work in the world where it is so cheap and easy to launch a tech company?

 

Doug