First, my post was about entrepreneurs and why they should raise VC. Polemical, directed, one-sided. That’s the idea. (There’s a shed-load of anti-VC spew out there already.)

On control and funding sources: raising any kind of investor capital means yielding some control. But your VC on his own has embarrassingly little “control,” given this big bad reputation; again, this is minority shareholding and usually one out of five board seats.

(Plus, it’s generally contractually impossible for us to control / operate the companies. We’re generally banned from it by our own investor agreements.)

On performance: think about this for just a minute. The money that flows to the investors (VC “performance”) is money that’s not flowing to the founders. Yes, its possible and desirable to align interests and seek win-win. But VC “performance” per se is emphatically /not/ what a rational founder is seeking.

(Plus, it’s generally contractually impossible and illegal for us to publicly disclose “performance” numbers. Seriously, go read the Securities Act.)

Please all — do continue to look critically at the VC world and push on the weak spots (like too many boards per partner, or fund life constraints). But don’t get bogged down in the irrelevant or ill-informed negativity.

Performance is highly relevant when it speaks to the caliber of the VC an entrepreneur is about to work with. It speaks directly about whether the VC can help the entrepreneur a success or not, and it is also a good way to have the sanity check whether the entrepreneur’s idea is valid or not. If you are trying to sell the idea that a VC is a great source of PR, mentoring, and so on, and the said VC has a lousy record (which is a reflection of their judgement, or one would think), why would an entrepreneur want to waste time with the VC? Its the blind leading the blind. Just take a look around town in Seattle, just how many VC firm is willing to publish their records or lack there of?

Bottom line is, VC as an investment class is a creature of the technology bull market that lasted for a few decades. It was at the right place at the right time, but the structure problem of this investment vehicle both for institutional investors and entrepreneurs is causing it to implode. Unless there is a structure change, no amount of glossing over will do. Perhaps it is time for many of the people in this sector to switch careers.

“Control” is a complete red herring as a purported negative aspect of VC funding. Take a look at a debt instrument (e.g. a bank term loan) and you’ll see /real/ control: a senior, perfected lien on all your assets, plus MAC clause etc. Get in bad with your senior debtholder and you’ll learn what “control” really is. VC influence is soft by comparison: board representation and minority ownership %. This is really cap structure 101, folks.

“Performance” is always an interesting point. Picking a VC to work with based on the industry’s (or a firm’s) financial returns is like picking a doctor based on the medical industry’s (or his hospital’s) average return-on-equity. Strongly relevant only if you are an asset-allocating institutional investor. (Arguably, an entrepreneur shouldn’t even care about returns to those investors, only those to himself and current shareholders.) The real question for the entrepreneur is, can I generate better returns for ME by having this particular VC involved (the old “50% of a lot vs. 100% of a little” question).

Randall also tried to skirt the issue of control. The most important aspect of a startup is control and ownership. Once that is given away, the entrepreneur is nothing more than a wage slave. I highly recommand all entrepreneurs read Felix Dennis (the guy who started Microwarehouse, Computer Shopper, Maxim and others) book, “How to Get Rich”.

What a VC like Randall should do is to put hard performance numbers on paper to back up to the idea why one should work with his firm. Don’t try to defend the whole industry, it is a lost cause. What say you Randall? How has Voyager done? Care to share the numbers?

Allen Morgan suggests things are different in capital intensive energy projects. Surely that is so. But I have no idea how you could do a startup energy generation facility /without/ private equity capital (lke VC).

This broad, extremely important topic is the subject of a set of posts that I’m drafting over the next couple of months. For my intro to the topic:

http://allensblog.typepad.com/allensblog/2009/08/financing-innovation-introduction-to-the-series.html.

I look forward to a constructive discussion.