Monday, February 06, 2006

Disrupting the VC Industry Redux: Disrupting Equity Financing

In the ensuring discussion fuelled by Rick Segal's original post on disrupting the VC industry many important points where raised by both sides. In particular Jeff Nolan of Venture Chronicles gives cogent arguments about the value of VCs in building and developing companies. Not the least of which is overcoming the traditional web services "hole" during scaling. Something I have commented on before.

The simple fact is that VCs are not going away. No matter how hard some people might wish. VCs bring value to the table. However, the value that VCs bring does not fit every situation. VCs are currently used as a one-size-fits-all solution to problems. This is where the VC or, more accurately, the equity financing industry will be disrupted. Disruption will come from solutions that address particular problems or situations within the equity financing industry.

In my previous post on this subject I proposed a VC marketplace as one solution. I foresee this market covering the early stages of new company/idea development. From conception to a product with a few customers and some revenue. Put in web service terms, this would be from conception to the beta with a few customers and some revenue coming in. It is from this point that VCs add value. The marketplace, while it could still be used, is not necessarily the best solution for further equity financing. VCs can help smooth the ride as the company goes through major growth spurt. The aim of VCs should be to help the companies leap the "hole".

The VC markeplace doesn't replace VCs. The VC marketplace compliments VCs. The marketplace provides equity financing to companies to get them to the point of being ready for VC funding if they so desire.

Does the investment company proposed by Dave Winer and seconded by Doc Searls have a place. Many bloggers don't think so. They point to the previous failure of publicly traded VC funds. As proposed, I agree. It really isn't a particularly good idea nor is it disruptive (no matter how you cut it) as stated. For its proposed vision it However, the company does have a place within the equity financing industry. Just not the one dreamt of by Dave et al.

The fund could be useful for providing cash injections into companies that either don't want to undertake a round of VC funding (remembering Guy Kawasaki's refrain "To much money is just as bad as to little") or don't wont to involve VCs in the company for some reason (they see the VCs as the devil in disguise). The fund is another way of raising equity financing when VCs or the marketplace aren't a suitable solution.

The fund would only address companyies with cashflow that have an equity requirement that is too small to be worthwhile for VC funding (which seems to be as high as US$10m at the moment and likely to go higher). The fund would focus on purchsing preferred stock as opposed to common stock. Which translates (very roughly) as purchasing a slice of future profits as opposed to a slice of the company

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