When a VC play goes south…

I was reading the TechCrunch story filed by Michael Arrington – FilmLoop betrayed by investors and came away with some serious doubts on VC process.

Filmloop raised $7 million from ComVentures in May of last year. Nine months later, with $3 million reportedly still in the bank, investors shut it down.  Apparently, it appears the ComVentures did it when forced by its Limited Partners ( investors in the VC Fund ) to clean up their act and get rid of loss making investments. The worst part is that the sale was forced to another portfolio company of ComVentures ( Fabrik ) for much less than a song. Now there could be two versions of the story here – one from the founders and other from the VCs.

But some questions need answers.

a)      If VCs are clueless about what technology and/or idea will be successful, why would they recommend investments at all ?  Is it because it’s not their own money ( it’s the Limited Partners’ ) and they are assured of their $ 500 k ++ salaries anyway ?

b)      We hear VCs often say, only one out of 10 investments that we make succeed.  Now that talks a lot about how good their selection process is and if so are they not just a bunch of pampered kids ?  Even FilmLoop appears to be a clone of YouTube and was ranked # 98 by Alexa.

c)      VCs are pulling out of a company and they think they are smart because of that?? That is the most ridiculous thing I’ve heard.. Who gives money to VCs who act like that? Do they disclose their practices to their investors?

 d)      VC’s are trying to portray the idea that there is a ‘magic bullet’ when it comes to a new idea or a start-up. Is there one ? I don’t buy that.  I still believe in cause and effect. However, playing with other people’s money, blood and sweat is so easy.. that’s why they can only turn 10% (if that!) into winners.

There is one major problem here.. Some VC’s really have people with little or no experience, no vision – just kids (a lot of times, out school!), basically, posing God because they have access to someone else’s checkbook..

Come to think of it – you had a 10% success rate at what you do, where would you be ?

And to think that the VCs are saying that so easily.. I’d fire those guys in a sec just for saying it. So, if the VC tells you that THEIR success rate is 10% – just RUN away from them as fast as you can. 

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2 Responses to “When a VC play goes south…”

  1. Rajesh R K Says:

    I am not a VC, just stumbled upon your blog through Venturewoods.

    a) No one knows what technology will be successful. You can only say that this MIGHT work – and there is a X% chance of it working. Otherwise there would be no falied ventures/technologies.

    b) FlimLoop is a clone of Slide – which shares a lot in common with YouTube. But you should remember that YouTube was not the first site of its kind. There is more to being successful that being first with a technology/market. And 10% is a good success rate IF you can get substantial returns from the 10% that succeed.

    c) Stop loss is a part of life, whether you are a VC, entrepreneur, trader. You should be able to admit failure and move on.

    d) I dont think any VC makes that claim. If fact the Bessemer site lists an anti portfolio – companies which they failed to invest in. Its quiet a laugh actually – because it reads like a whos whos. It takes courage to accept failure.

    I am happy with a VC who has 10% success rate. Because I think the companies which can claim better can be counted on the fingers of one hand. But what I would look for is

    1) do they believe in the idea and the vision of the company

    2) do they have previous experience in the space

    3) theie rolodex 😛

    Happy to know your response.

  2. krish Says:

    Rajesh,

    Thanks for the comment.

    a) With the passage of time you gain experience. By refining your screening and investment process, you develop a sense of picking up on weak signals. That’s how you get into the Midas List of VCs like John Doerr ( KPCB ), Michael Moritz ( Sequoia ), Ram Shriram ( Sherpalo ), Vinod Khosla ( Khosla Ventures ). Look at the sheer variety of technology ventures where these people invested and hit pay dirt. Not all of them had domain expertise in all these ventures. That’s how Men differ from Boys.

    b) YouTube’s success has nothing to do with being an original or a clone. It had a higher volume of traffic and stood tall ahead of the pack so that Google never had to see others behind it. A good VC should know how to position his portfolio companies such that they get swept by the acquisition storm. To think of supporting a venture, run out of ideas and then cut, run and sell it to another portfolio company for recovering the cash in the balance sheet like ComVentures did to FilmLoop / Nishan Systmes / Firefly mobile is acrimony. The investors will put up with 10% success rate only so long as that’s the industry standard and not when others with better processes have higher success rates.

    c) Stop Loss is relevant when you speculate. VC business is all about taking informed, intelligent bets on your preferred domains. Nonetheless, it’s a sensible thing to do when you know you’ve made the right call but extraneous factors ( beyond your control ) did you in. Not when you make an error of judgement and use it to cover your rotten ass.

    d) What else do you think they profess when they go with the bowl to the investors while building their fund ? If you get to see the claims they make in that fundraising document they circulate to investors, you’ll puke.

    Rest of your comment is a matter of opinion. Your liberties. I have stated mine. Thanks for stopping by.

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