The VC Model Is Broken, Part XVIII

Want to get the VC world’s attention? Just create an exceptionally dour PowerPoint presentation, and hope someone leaks it into the blogosphere.

Last month’s example came from Sequoia Capital, whose “graveyard” deck provided the firm’s portfolio companies with PR cover for mass layoffs. This month’s comes from Adeo Ressi, founder of love it/hate it website TheFunded.com, and is titled “The Canary is Dead: Something is wrong in venture capital.”

Ressi developed the presentation for a private talk at Harvard Business School, and a local startup CEO (and former venture firm EIR) leaked it soon-after. You can see it at the bottom of the post, but the basic gist is that the VC model is broken because VC firms don’t believe they can succeed in a more efficient market. In other words, the consensus is: “You have to be brilliant to make money in this system, and most firms are not brilliant. Except for us and a few others.”

Ressi’s presentation has been getting slapped around the VC blogosphere at bit, in part because he and VCs are coming from very different perspectives. Ressi is an entrepreneur interested in the success of other entrepreneurs, while VCs are a necessary evil for achieving those ends (my words, not his). VCs, on the other hand, are most focused on producing fund returns. That includes extreme dedication to their portfolio company CEOs, but not too much concern for the entrepreneurial class at large.
The result is that Ressi and his VC critics often seem to be talking past each other.
I spoke to Ressi a bit yesterday about the presentation, and played some devil’s advocate on issues like fund sizes and how bust-times change VC behavior. But we also found agreement on some points, including the need to at least revisit two and twenty.

Also, he is 100% correct that VC firms should increase transparency when it comes to what they are looking for. Not so much in terms of industry sector or company stage (most firms already do that), but in terms of the actual pitch process and typical terms. Be specific about how entrepreneurs should approach you, what you’re looking for in a presentation, and what terms you are probably willing to offer if interested (not valuations, but participation, etc.). This stuff is rarely trade secret, and can save both the VC and the entrepreneur valuable time and effort. Moreover, it will help VCs from missing out on certain opportunities because of the presentation rather than because of the potential…

Update: Adeo has posted a guest blog on all this. Read it here.