Hand Over The Cash Or We’ll Smash The Place Up

The UK Venture Capital industry has become the latest to thrust its hand out for a £1 billion bail out claiming that it is “potentially a lost generation of companies.”

Why? Well, as we predicted,  the reason is that VCs cannot get exits and cannot raise fresh capital for their current portfolio companies, something that may have been buried in the small print of the term sheet. As a result many companies cannot raise the second or third rounds of financing that they were expecting and may go to the wall. The industry as a whole is now demanding that the UK government fork over a wad of cash so that they can continue to take their management fees continue funding innovation.

The implicit threat is that without that investment, a whole raft of companies developing clones of Facebook and Twitter may be lost forever. Instead of bemoaning this we should be shouting hooray!  How many billions of dollars have been ploughed into “me too” investments by people who can’t see beyond the narrow confines of Web 2.0? ? It’s hardly innovative now, is it?

As I discussed last month, the VC industry is becoming a bit of a lame luck. The world has changed, quite fundamentally, and ploughing on with a business model that clearly does not work, either for investors or entreprenueurs doesn’t seem a very sensible course.  Rather than handing out public money to fund unsustainable businesses, we should be waking up to the new economy and making sure that any resources are ploughed into taking advantage of the future, not applying sticking plasters to a half dead industry.

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Comments 4

  1. Ho Hum

    I presume you have a better, well thought out model for providing young companies with the necessary resources (financial, strategic and people). Before moaning about what you have in front of you, it’s always worth repeating Churchill’s comment on democracy (“it’s the worst system of government – apart from all the others”), and wondering whether the same might not apply here.

    It’s also worth pointing out that the fees on most venture funds nowadays are not huge. It’s the private equity funds that have grown to such sizes that the fees have become the major source of (risk-free) revenue/profit for the managers. Very few UK VC’s are in any position to do much more than survive on the back of the fee levels, so the rather snide comment above is rather wide of the mark.

    Anyway, back to the main point – your proposals, if you will.

    Thanks for the blog, by the way. Very readable and helpful

    1. Post
      Author
      Tim

      Mark,
      In answer to your first question, yes we do have what we think is a better model and have raised a substantial amount of capital as a result. I’d love to be able to elaborate further but confidentiality agreements etc with our investors mean that our hands are tied for the next few weeks at least. In any case, it is always better to wait until we are able to reveal the iridescent butterfly rather than dangling a swollen but frankly far less impressive chrysalis in front of you. However, once I am able to pop my head above the parapet I’ll be more than happy to have our model picked apart. I think we have hit upon a solution, but there may be other models that will emerge that may be better, or to continue to paraphrase Churchill, less worse than ours, and the financial world is something that is a work in eternal progress, as are most technologies.

      I do have some sympathy with the plight of the UK VC industry, and I do recognise that your hands are also tied as a result of working to rules that haven’t changed too much in the past half century – but I would also argue that banging your heads against a wall for fifty years and then demanding an aspirin does not display the sort of creativity that is often demanded of investees.

  2. Ho Hum

    Tim

    Good to hear there’s something bubbling under. I agree the VC model is far from ideal. Sometimes it feels like the structure of funds (ie the 10 year closed fund model) is the main culprit, a lot of the time it feels more like the fact that we have created a fragmented patchwork of subscale funds that are simply too small to be able to do the basics – build a diversified portfolio and avoid being washed out at some point during the path from alpha to omega.

    Do let me know when you’re ready to show your creation to the world.

    BTW (and feel free to moderate this out) I might as well confess my past, since we touched tangentially, though as far as I know we never met. I used to be Charlie Hunt’s boss at NESTA, so remember Nanosight with fondness.

    Best wishes

    Mark

    1. Post
      Author
      Tim

      Mark,
      I thought your name rang a distant bell! I think you have put your finger on the problem with your comment, and making sure that we have the ability to “build a diversified portfolio and avoid being washed out at some point during the path from alpha to omega” is exactly what our new vehicle is all about.

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