Is InLab's VC 3.0 the Cure for What's Ailing the Venture Capital Game?
He's joking, but only sort of. The ballyhooed launch of this new VC model comes in the midst of heated ongoing discussions about whether venture capitalists are still needed to build software companies. (No one doubts they remain necessary for big, capital-intensive plays in sectors like semiconductors and greentech.) FourSquare and dozens of other hot startups have ramped up quickly to big user bases and sky-high valuations, prompting their founders to actually turn away venture capital. And critics of VC such as Vivek Wadhwa have called into question earlier claims of success that the venture capital community has cited as evidence of its important role in economic growth and company formation.
At the same time, a welter of so-called super-angel funds have swooped in to steal a march on the larger, more traditional venture capital funds. The storied industry saw its annual returns go negative last quarter for the first time in a decade, and many pundits believe the sector will shrink by as much as 50% before it normalizes with smaller, more nimble funds making smaller but more frequent investments.
Providing Real Help, Not Just Cash
InLab, an established venture capital firm, is positioning its VC 3.0 model as a well thought out antidote to much of what ails VC. For example, the new fund will not collect the 2% annual management fee paid out by limited partners to so-called general partners. On larger funds, that 2% carry assured general partners salaries of over $1 million -- even if they never managed an IPO and ran the fund into the ground. In other words, you could get rich with a slate of really bad investments and no strings attached. (You might never manage another fund, but easy come, easy go, eh?) "We don't want to be money managers. We want to align our interests with those of the limited partners," says Doyle.
"We estimate that 30% to 60% of venture capital money is wasted by startups," says Doyle. "They make too many mistakes, pay too much for services, or fail to pay for marketing or PR because they are trying to save money. And that's a big reason why they fail."
Certainly, there is some merit to that argument. It's in the interest of IT shops and PR agencies, for example, to run up big tabs or collect huge retainers while delivering as little as possible. (My friends in PR would dispute this, but its Economics 101.) At any rate, think of VC 3.0 as providing something like a professional employer organization on steroids, and customized for the needs of startups.
Thinking Outside the IPO Box
Another sacred cow gored by VC 3.0 is the IPO Myth, because the folks at InLab think the Golden Age of the IPO market will never return.
"We position our companies right from the start for M&A activity and not for a public offering," said Doyle. "We just don't think those markets are going to come back, possibly ever." Some might disagree with that, noting that with IPOs for Facebook, Etsy, LinkedIn and Zynga stacked up to the horizon, the pool looks remarkably robust. But overall, IPO activity remains diminished from its peaks. And, many VCs confess, structural changes in the stock market --- such as the very high cost of Sarbox compliance for smaller companies and the pull-back of small-cap institutional investors -- have removed much of the incentive to go public.
Doyle claims that InLab's model also incorporates far more rigorous due diligence. This includes bringing in more subject experts to assess a company and its prospects.
"We believe too many funding decisions are made on gut feelings," says Doyle. "We want to replace that with a rigorous process." The VC 3.0 system also rewards VCs for spending more time with portfolio companies, addressing a key complaint about venture capitalists -- that they often are not highly participatory.
So will VC 3.0 work? InLab has been running a $6 million portfolio of nine companies under this system for several years. Doyle points to the fact that of those nine, two are already close to liquidity events (after a mere two-to-three years) and several others are already profitable. And other companies are taking note: InLab is licensing some of its tech and methodology to venture capital analytics firm CapGemini.