The VC Model Is Broken, Part XVIII

Want to get the VC world’s attention? Just create an exceptionally dour PowerPoint presentation, and hope someone leaks it into the blogosphere.

Last month’s example came from Sequoia Capital, whose “graveyard” deck provided the firm’s portfolio companies with PR cover for mass layoffs. This month’s comes from Adeo Ressi, founder of love it/hate it website, and is titled “The Canary is Dead: Something is wrong in venture capital.”

Ressi developed the presentation for a private talk at Harvard Business School, and a local startup CEO (and former venture firm EIR) leaked it soon-after. You can see it at the bottom of the post, but the basic gist is that the VC model is broken because VC firms don’t believe they can succeed in a more efficient market. In other words, the consensus is: “You have to be brilliant to make money in this system, and most firms are not brilliant. Except for us and a few others.”

Ressi’s presentation has been getting slapped around the VC blogosphere at bit, in part because he and VCs are coming from very different perspectives. Ressi is an entrepreneur interested in the success of other entrepreneurs, while VCs are a necessary evil for achieving those ends (my words, not his). VCs, on the other hand, are most focused on producing fund returns. That includes extreme dedication to their portfolio company CEOs, but not too much concern for the entrepreneurial class at large.
The result is that Ressi and his VC critics often seem to be talking past each other.
I spoke to Ressi a bit yesterday about the presentation, and played some devil’s advocate on issues like fund sizes and how bust-times change VC behavior. But we also found agreement on some points, including the need to at least revisit two and twenty.

Also, he is 100% correct that VC firms should increase transparency when it comes to what they are looking for. Not so much in terms of industry sector or company stage (most firms already do that), but in terms of the actual pitch process and typical terms. Be specific about how entrepreneurs should approach you, what you’re looking for in a presentation, and what terms you are probably willing to offer if interested (not valuations, but participation, etc.). This stuff is rarely trade secret, and can save both the VC and the entrepreneur valuable time and effort. Moreover, it will help VCs from missing out on certain opportunities because of the presentation rather than because of the potential…

Update: Adeo has posted a guest blog on all this. Read it here.

View SlideShare presentation or Upload your own. (tags: lp investing)


  • Mostly very good points. Though I don’t agree with reducing vc firms. Basically the vc business is a commodity business now. Most of the people in it are average and not anything to write home about. A few good people and also a good share of idiots. Most are spreadsheet toting pontificators. The interesting conversations are when lawyer vcs act like they are engineers. I have no idea why lawyers become vcs – etc. the nokia fund blue…. sort of a joke of a fund.

    The presentation is also right in that most LP returns are (i) due to one or two deals that are hits out of the park and (ii) these don’t come from your so called people with a track record or so called experienced entrepreuners. In fact I will postulate a thesis that radical ideas do not get funded, simply because of some of the points made in the presentation.

  • In response to your comment that VCs should “Be specific about how entrepreneurs should approach you, what you’re looking for in a presentation, and what terms you are probably willing to offer if interested (not valuations, but participation, etc.).”

    It really shouldn’t be the VCs job to tell an entrepreneur how to present their idea/company, because 1) we need to get a “clean read” on the team and an unadulterated pitch is the tried and true way to do this, and 2) given the volume of companies we meet, it simply isn’t practical from a time standpoint anyway. Furthermore, given the extraordinary low percentage of those companies that will ever progress to a term sheet, it would be a dramatic waste to spend time talking about specific terms upfront.

    Terms like participation which you mention are one piece of a complex negotiation that will ultimately be dictated by deal competitiveness, diligence conclusions, valuation expectations, and slew of other terms so, there is no way you would be able to specify what you are “willing to offer” up front.

    The fact that there is no boiler plate can work as much in the company’s favor as the investor’s

  • VC is a cottage industry that habitually shoots itself in the proverbial foot when success results in massive inflows of capital from institutional investors. The result being referred to as boom and bust, but more accurately described as a subtle but significant shift from demand to supply driven capital. Just as was the case in mortgages, when investments are driven predominantly by the availability of capital, bad things happen.

    VC will never achieve the transparency that you (and I for that matter) desire because it opaqueness is what is believed to provide competitive advantage. Without brand and network advantages, all VCs would be equal because capital is fungible.

    I don’t think this business will ever fundamentally change because there is simply too much vested in the status quo by the small group of venture investors that actually generate significant returns. I will speculate, however, that the broader world’s fascination with exotic capital mechanisms like hedge funds and venture capital has probably hit it’s zenith by now.

  • Is it bad that technology innovation is chronically over-funded?

  • Excellent and spot-on timely article….the key point communicated here, that in my own experience is one of the fundamental flaws of operating models of VC’s

    – VC’s must be able to make a higher volume of smaller investments at earlier stages in order to reasonably spread risk and increase likelyhood of success

    – This cannot be done effectively (in our opinion) without maintaining serious DOMAIN EXPERTISE in the sectors you investing in, in other words, former analysts/mgmnt consultants are flying blind as the investment-stage gets earlier

    – Investment terms must get standardized, theres been much credibility lost in the industry by variable term sheets


  • @Alex, yes it is bad. Not only does the overfunding breed capital inefficiency but it also sinks the returns when compared to other asset classes. VC funds depend on institutional investors for the bulk of their managed capital, when those spigots turn off because those investors no longer see the return potential, it craters the entire business.

    @Michael, you make fair points but a more immediate and much larger problem for venture investments is the lack of exit options. Spreading capital to more early stage investments may spread risk but the reality that few of those investments will be able to exit because there are but a handful of acquirers and no public market options.

  • @jeff nolan, not only does overfunding breed capital inefficiency but it also it also breeds whole generations of mediocre to bad VCs. Part of the broken model is how easy it has been to become a VC with little qualification as a good investor. Most VCs may have been good lawyers, good operating guys/gals, good students or even good engineers, but there way too few that are actually good investors who know how to build companies *and* a nose for innovation. Bad VCs lead to bad investment theses such as cleantech and Web 2.0. There will be billions of dollars of carnage in these two areas just like during the dotcom bust.

  • I have raised tons of capital from VC..they pay my bill now…but only few of them should be in this business. On daily basis I speak with VCs who got their MBA but have no operating experience..some worked as an analyst or some even as a business journalist …before becoming VC at a successful firm….I like them because they send me business but there is no way they can help any of their portfolio companies. They are good for CAPITAL only…not bad for some entrepreneurs but I can assure you that they may get lucky with few exits but most of the time their ventures will fail…I can give you a long list of companies wrecked by their BOD/investors. IMO, guys who built this VC business were good and they knew “how to build companies” …returns followed. These guys are retiring now and they are replaced by incompetent investors (if that’s who they are?)

  • venture capital has turned into investment banking and money management, not risk capital as it began 30 years ago

    now it’s guys like mike moritz with arrogance that’d make a vulture puke

  • LPs should require a full accounting and fire the bottom 80% of venture firms…six sigma those lazy bastards

  • […] if that wasn’t enough, Adeo Ressi of then wrote about how the VC model is broken in his presentation called “The Canarie is dead: Something is wrong in Venture […]

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