There are some who suggest that the venture capital model is broken since the returns for many VC firms are quite low according to some reports. In light of these findings, anyone hoping to profit by investing in a startup company will need to seek expert advice before cutting a check. Here are some tips from a number of leading VC experts:
Invest in Talent More Than Ideas
Passion Capital, a successful VC firm in London, has shifted its focus from ideas to the quality of the teams on a startup. Gigaom reports, “What started as a factory for backing ideas quickly became a talent agency: aimed at getting people who have ability and chutzpah together, in a way that almost trumps the quality of the ideas they have — because the ideas will inevitably morph.”
If a VC bets everything on an idea backed by a weak team, the team may not be able to adapt themselves to a new plan when the market changes.
Entrepreneurs Need Partnerships for Large Ventures
As investments in the renewable industry in 2008 demonstrated, large ventures that require technology development and large factories can be extremely problematic for investors. If a venture requires a significantly large amount of money to launch right from the start, and its facilities will eat up a chunk of that funding, VC’s should be wary of moving forward without lining up some key partnerships.
Tim Woodward of Nth Capital suggested the following about the renewable energy startup failures, “In biofuels, a lot of folks are a lot more focused on core technology — the enzyme, the gasification approach or whatever it is — and working with a partner with an established balance sheet that can build large plants leveraging your tech. And I think the same thing is going to be true of solar. Companies are going to quickly move to sourcing partnerships in Asia and other parts of the world.”
Venture Firms Work with Diligent Investors
Now that investors have seen the failure of venture firms in the past decade to properly vet their portfolios, there is a renewed interest among many investors in digging deeper into the details of venture capital firms. Those who can provide investors with reassurance will be more likely to keep their investors happy.
The New York Times reports that investors, “want more transparency from the famously tight-lipped funds, and in some cases, they are getting it. One firm has started giving limited partners files with its portfolio companies’ financial information, a rarity. And limited partners say venture capitalists are increasingly available for one-on-one meetings.”
Entrepreneurs Benefit from Their Proximity to One Another
One of the key strategies used by Passion Capital has been creating a space where 13 of their 20 funded companies can set up a headquarters. Stefan Glaenzer of Passion shared that he was surprised by the unexpected benefits of hosting startups at their location.
“‘To be honest, we thought our advice was going to be the most valuable part because we are parked here, but in reality it’s the meeting among the founders,’ says Glaenzer. ‘It’s a lonely job, being an entrepreneur, and they are sharing all sorts of stuff.’”
By creating an atmosphere that is friendly and supportive toward entrepreneurs, Passion Capital is able to provide both the insight and networking that many entrepreneurs require in order to persevere with their ventures.
Successful Venture Firms Invest Their Own Money
A recent study by the Kauffman Foundation discovered that VC firms have generally produced poor returns on investments, though confidentiality agreements prevented the report from naming which were successful. However, the one bright spot in the report is that smaller VC firms performed better because they tend to have their own funds on the line with each investment.
The Wall Street Journal suggests, “The [Kauffman] report also offers support for the belief that small venture funds are the most successful. Only four of 30 VC funds in the foundation’s portfolio with more than $400 million in committed capital produced returns better than those from a publicly traded small-cap stock index fund.”
Even if some venture capital firms have taken a hit lately with failed investments, there are still many investment opportunities available for those who invest in the right people and do their homework before jumping into a new venture.This guest post is written by Lior Levin, a marketing consultant for an inspection company that offers services for Pre shipment inspection in china.