Comments on: Wither The VC Model

By: Is the VC Model Broken | TechWag

Is the VC Model Broken | TechWag — Sun, 05 Jul 2009 18:26:24 +0000

[...] and Nathian Kaiser, two awesome people to get to know and both are startups are seriously taking a look at the VC [...]

By: Marcelo Calbucci

Marcelo Calbucci — Tue, 30 Jun 2009 18:26:50 +0000

Your math is very biased.

First of all, VCs don’t model 20x, they model 10x returns and depending on the opportunity and business growth, they will settle on a 5x or 2x exit (a 2x exit on a business that stopped growing is a win). I actually know stories of VC exiting at 1x because the business stopped growing.

Second, if VCs are investing $3M for 33% for the comanpy, that means a pre-money of about $7MM. So, the company might be overvalued from the get go, which means a $7MM exit doesn’t make any sense at all.

But the premises of the post are rights. You diminish your chance of a lower exit every time you take investor’s money (VC or angel).

By: The Exit Guessing Game - How Much Will They Be Worth | Insights into Startups and Entrepreneurship - nPost Blog

Tue, 30 Jun 2009 15:56:22 +0000

[...] Wither The VC Model The Exit Guessing Game – How Much Will They Be [...]

By: Victor

Victor — Mon, 29 Jun 2009 17:42:52 +0000

This is why there needs to be a hybrid investment structure along the lines of micro-loans for Third World countries. It also screams out loud that the economics of VC doesn’t make sense. I believe VCs, as a group of professional investors are just as over-priced as the Wall Street bankers. Until they face the music and reduce their fees, and learn to do more with less, like the rest of the world, they will be irrelevant.

This would of course mean lower fees, or even smaller investment pools, and it would drive the investment size smaller. They need to get back to basics, pre 1995 days. I think startup guys are smart enough to know on the margin, VCs are just not providing enough value.

By: John Dietz

John Dietz — Mon, 29 Jun 2009 16:33:28 +0000

I’d been thinking along very similar lines recently, being concerned about over capitalization when so much development can be done with very low burn rates these days. I was thinking about it more with regards to a lot of companies that have already been capitalized to the tune of $10 or $20 million and what their exits would have to be to make those VC’s any significant return. Is the 20x return unreasonable? Even at 5x or 10x some of the companies are going to have a hard time exiting.

By: Denny Chapin

Denny Chapin — Mon, 29 Jun 2009 16:20:54 +0000

Nathan, seems like this is especially applicable to web apps / tools as opposed to online retailers, e.g. Scribd vs Amazon. Many of these startups require a dev team and some data collection qua India (read->teachstreet). When you take the physical goods out of the value offering the margins do seem less appealing, at least for a VC.

Cool post.

-Denny Chapin