But few have thought as long, come up with an analysis as detailed, or enjoy talking about it quite as much as the folks at InLab Ventures. That is the impression I got yesterday afternoon talking to Greg Doyle, a “managing member” at InLab, who is attending this week’s DEMO 2010 conference in San Jose. The firm, which has invested in 10 portfolio companies to date from a $6 million starter fund, just released a white paper called “Venture Capital 3.0” about what it sees as the future of venture capital — and the current problems. The firm even did a kind of infomercial about the white paper that is hosted by Jenn Karlman (pictured), who is identified as an “Anchor for InLab News” on the firm’s website. (We’re not making this up.)
The ideas fill up some 20 pages, and InLab has been working on its methodology for close to a decade. But in the interests of avoiding spending six hours on a blog post for a readership that would probably prefer just four paragraphs anyway, I’ve oversimplified it to the following:
One of InLab’s core observations is that today’s VCs suck at diligence. It argues that there has been no substantive innovation in diligence in decades. VCs rely too much on “gut feel” rather than scientific analysis, partner politics are a distraction, and venture returns reflect these shortcomings. In Lab’s solution is to institute a long, multi-phase review process that it claims provides a more scientific, objective approach to identifying top startups (more on that later).
Another problem, according to InLab is that the fee structure of most venture firms results in a misalignment of general and limited partner interests. Also, VCs don’t spend enough time with their portfolio companies. InLab’s solution to both those issues is that VCs should get paid based on the work they do for portfolio companies, rather than a flat percentage of capital under management. For its part, InLab says it does just that. Its staff provides services to its startups, like marketing, PR and non-core IT. It then bills the startups for these services, which they choose to pay for with the money they raise from InLab. Not sure if it’s a better way to go, but curious to see how it plays out.
As for that scientific review process, the white paper (download here) goes into more on that. Basically, from my conversation with Doyle, I gleaned that it’s a long process through which companies submit to a pre-screening questionnaire, an initial IP review, an accounting review and an initial assessment of their business plan and target industry. Then, if they make it through that, InLab takes the company to Phase II — essentially a 30-day review period that includes grilling from 10 or so experts, including a potential acquirer and subject-matter expert. The result is a 75-page consulting document, and a decision on whether or not to fund the company.
What sort of picks does the process churn out? Two examples Doyle pointed to include Isis Solutions, a predictive analytics and business intelligence software developer, and Channel Islands, a developer of set-top box software. To make the cut, he says, companies must show they can provide at least a 10x improvement over incumbent technologies.
It sounds like a tough call. But hey, no one said venture capital investing was easy. If it was, VCs wouldn’t have to sit through endless discussions and white papers about how the model is broken.