There are 3 main things VC’s claims to provide – money, connections and strategic advice. For the last 3-4 decades that’s worked fairly well for them since they have made good money from the management fees even if their returns have not been spectacular.
If a VC firm rises a $50 Million fund, and has a management fee of 2% per year, with 2 partners, 2 associates and a swanky office, they still get to take over $250K per year in salary and upside on exits.
The work was primarily evaluating companies and entrepreneurs, providing strategic board advice, governance to existing companies and networking.
That model assumed investments in about 10-15 companies and among the 2 partners, (7 board meetings per person), so time was tight, the only advice that could be provided was “strategic” in nature, or “connections” to folks.
There were a few top tier VC’s who would help recruit key employees or help in closing key deals, but those were rare.
What if however VC’s were entrepreneurial in nature?
What if they needed to provide marketing advice, help in structuring sales compensation and help determine product direction besides other “strategic” input?
That’s what Andreessen Horowitz is doing right now. They created a executive briefing center, staffed it with a seasoned pro (disclosure: Mark Cranney is a good friend, and others in A16Z were colleagues as well) in sales who is helping drive sales opportunities, hire sales professionals and helping entrepreneurs develop sales compensation models.
This is what YCombinator is doing as well, with their hiring of key technology folks not just the traditional “VC” material.
They can do this because their fund size is large and the founders have already made a lot of money, is the common criticism I hear from valley VC’s.
If other VC’s dont do this however, they are going to be disrupted.
VC’s everywhere have to go beyond their comfort zone, hire more professionals in technology (how about a CTO who can help invested companies with technology hiring, scaling etc.) marketing (strategic content marketing plan, etc.), sales (hiring, sales compensation, building and scaling a sales team) and operations.
What would that mean?
Lot more involvement with portfolio companies, multiple touch points besides the CEO alone and closer involvement with the companies. They’d still be busy: as much or more than they were before. This would also mean they would have to get a mile deep and few inches wide as opposed to a a inch deep and a mile wide.
VC’s would make less money in their annual salary, since the management fees would remain the same, but more people would be involved in the firm, which lowers the amount of money per person. Their chances of success with their portfolio companies should improve, which means they would make the same money as they did before, but with more of it coming from carry (the right incentive anyway).
They would possibly have to invest in fewer companies, since they just wont have the time to spread themselves thin. The problem is that VC’s still think 1 in 10 companies is a hit, 2 return money and 7 go bust. I think to improve those odds, they will have to focus more on picking those that have some early traction, and are going after a proven market. All other VC criteria remain the same.