Venture Capital Is Risky For A Reason
from the risk-reward dept
It’s always amusing to see some country suddenly decide that it wants to be entrepreneurial, and figure that all they need to do is get some venture capital flowing. Beyond the fact that easy access to capital is just one of a few important factors in building out an entrepreneurial culture, this sudden focus on the importance of VC cash leads to some bizarre ideas. Take, for example, the situation in Canada, where in an effort to build up a bigger VC industry, a Canadian VC trade group is asking the government to offer loan guarantees up to 30% of money invested in VC funds. Of course, this seems to miss the point of venture capital investments. They’re risky. They’re risky for a reason. It’s early stage capital, where there’s a high probability that the investment will tank — but for the investments that succeed, the payoff can be extremely high. Therefore, it makes sense for those investing to recognize the type of investment they’re getting involved with (which is the reason not everyone can invest in most VC funds). Guaranteeing some portion of investments in a VC fund distorts the market, and makes those who are more risk averse jump into a market where they don’t belong. If they’re not willing to take on the full risk, then they shouldn’t be investing in these funds. As for the Canadian VCs who are trying to get this government subsidy, perhaps they should simply focus on doing a better job selling what they can offer — and making sure their investors actually understand the nature of venture investments.
Comments on “Venture Capital Is Risky For A Reason”
After reading the article, it sounds like the Canadian VC industry is looking for steroids. They want to be as big and bad as other players. There were some statements that concerned me as being extremly wishful thinking:
“It also said the industry needs to focus on winners, by cutting off non-performing companies quickly and funding firms who prove successful with investments comparable in size to U.S. companies.”
How often does this happen in reality? Yea, every VC wants to be able to know they have a bad investment, but how many times have we watched good money follow bad?
I think they’re betting there will be a lot of upside and little to no downside.
I also find this statement funny:
“The government loans would be repaid in full once the venture funds are able to recoup money invested in any startup company that decides to go public or merges with another firm.”
Maybe I’m interpreting it wrong, but when has a government ever consistantly made payments in full. It’s the nature of the government. Money isn’t just sitting around. It has to be appropriated, budgeted, possibly taxes collected. All these things have to happen for this ‘backstop’ to work correctly. Look at Social Security just as a comparison. It’s been chronically underfunded or underexecuted. My point is that you can’t rely on the government to save the day.
I think if Canada creates something in their government to do this, it’ll end up like the Pension Benefit Guaranty Corporation. A lot of VCs will dump bad debt and bad investments on it. Canadian citizens will be left holding the bill for VC speculation. The boom/bust risk should stay entierly with VCs.
Re: VC Steroids
Aaron,
You made some great points. Especially the last part of dumping the bad debt and leaving the taxpayers to foot the bill.
I can’t say I know much about Canadian Venture Capital Companies, but one reason they work so well in the U.S. is the understanding that failure is a part of success.
I’d even go so far to say that most ventures probably will fail. Oh, you’ll do your best to ensure it won’t, but no risk equals no reward. It’s that understanding of risk v. reward that ensures success.
Losers
Governments can’t find winners;
but losers can always find governments.
Were you to put a working matchbook-sized cold fusion machine, made out of nothing more than popsicle sticks, in front of a Canadian VC, the FIRST THING he’d do is ask to see your financial projections. Then he’d say something like “well, you know this latest fund is targeted only at web apps, so we can’t help you”.
There are no Canadian VCs, only frustrated risk-adverse merchant bankers.
THAT is why they don’t make money.
Re: Canadian VCs
“Then he’d say something like “well, you know this latest fund is targeted only at web apps, so we can’t help you””
It’s the same across the world Canuck. There are those with the intellect, ambition and vision and there are those with the money.
The latter are wholly ignorant of new technology and its potential.
They may as well throw darts at a list of names because they are
unqualified to make judgements based on the merits of a proposal.
And for the mostpart the former are ignorant of the bizzare world
financial people inhabit. I’m not sure how this unhapy polarisation
of intellectual and financial resources came about, but it serves neither technology nor the economy. Meanwhile, a very few all rounders who understand finance and technology, the Bill Gates of this world can make it on their own, run away with ball and leave the rest us paralysed by division scratching our heads. Have you ever talked to financial backers? They talk complete gibberish from a fanciful make believe world. When you speak engneering and computer science to them they glaze over with that blank comatose look. How can business prosper with such a fundamental lack of communication?
All VCs are fools
You write some groundbreaking formula on the blackboard before them and try to explain how in 10 years it will be incorporated in each and every computer on this planet.
They look at you like you are some kind of imbecil who just escaped some mental institution.
No wonder the CEO of RSA Data Security Jim Bidzos was completely unable to raise any VC funding at all, having a valid patent and a working implementation in hand…
Those people have their brains wrapped around some stupid bussiness-model concepts, much like some people on Techdirt…
“New technology is nothing, bussiness model is everything” Go figure…
Canadian VC?
Didnt know Canada had a large Vietcong society