The New Venture Capitalist: Not your Dad’s VC

The paradigm is shifting in VC land. In his blog post Deal flow is dead, Bill Burnham draws the funny and highly apt parallel with VCs being akin to bears fishing in a salmon run. In the old days, there were few VCs and many entrepreneurs looking for cash, and finding deals was like standing in the middle of a salmon run, and swatting a few of the best picks, at will.

Deal flow is becoming passe. Not that deals don’t still flow. Some do. But there are a whole lot more bears fishing in the stream. Pickings are getting slim - or so you would hear if you talked to VCs.

Now change phase to the entrepreneurs. They are still complaining that it is hard to fund a company. So where is the big disconnect?

Talking to VCs at small funds reveals a deal acceptance ratio of about 1:50. The ratio goes up to about 100 for mid to large funds and about 150 at the top tier. While these numbers are not exactly small, the quality of deals does not seem to be up to the expectation of most investors.

The mid tier funds face a double whammy. They not only see fewer business plans for each company that they fund, they are not privy to the best deals, which tend to go to the top tier funds.

In time, we will see a cycle where the smaller or lesser known funds will see fewer of the good deals, and have a harder time returning a decent ROI to their investors. This will make it even more difficult to raise their next fund, and might ultimately result in an even larger chasm separating the smaller funds, and the monolithic ones at the top.

So is there anything that VCs can do to reverse this trend?

1. Start a hatchery: The best way to spur innovation is to seed it at a formative stage. Recently, Mark Stevens at Sequoia Capital, gave a generous $22M gift to the University of Southern California, to establish the Stevens Institute for Innovation. Creating the right enviroment is a great head start towards ensuring that more and better ideas will get to the marketplace, to create the next wave of successful companies.

2. Find new rivers and streams: Many VCs of small funds are doing this already. They realize that it is no longer possible to sit still and wait for the deals to come to them. Several have found non traditional ways of finding new deals before they come to the market and bidding between funds makes them unattractive investments. Some firms such as Venture Farm in Irvine, CA are finding companies while they are still in the idea stage, and carrying them into the next stage in their life cycle where they will become investable companies.

3. Grow a stronger run: Mentorship is absolutely critical in carrying a company from its idea stage, into one that is ready for success. The Tech Coast Angels has set up mentorship programs with Universities, to help spur not only the commercialization of technology into viable companies, but also to support budding entrepreneurs so that they are able to take their companies to the next level. In order to generate future successes, VC firms might find it worth their while to take on and mentor would-be entrepreneurs (in the same way attorneys are expected to spend a certain amount of their time doing pro-bono cases), so that for every deal that they invest in today, there are 5 more that will form viable companies for them to invest in tomorrow.

4. Support the environment: Surprisingly, many entrepreneurs whose companies were passed up for investment by the top VC firms said that the partners at these firms were very good at keeping in touch with them. Smart VCs know that entrepreneurs are very resillient; The same person who presented a half baked idea today, will be back in a year’s time with a better idea and a better plan. Continuing to support the ecosystem is not just a good idea, it makes great business sense.

Perhaps we should heed the wisdom of the American Indians: Whenever you take from nature, put something back in its place.

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