Dave has a great writeup on reforming the VC industry (at least in consumer internet segment). Looks pretty 2.0ish to me — but perhaps the first 2.0 idea that makes sense 🙂
– disintermediate the LPs and GPs (the overhead and loss of information here is not funny)
– users who invest in this fund (in public markets) are also the customers of potential investee companies, so smarter decisions get made
Could we get a million passionate internet users in India to invest Rs 1000 each to create a Rs 100 crore corpus as a starting point?
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Hi Alok & Sanjay,
Consumers as investors – there’s novelty in this idea, but will it work ?
As a consumer, I would love to buy things cheap…as an investor, I want my company to sell its products / services at high prices….( better realisation for my wares so that my EPS creeps up, quarter after quarter ) .
..now if that’s not conflict, what is ?
The biggest challenge for Indian VC at present is the soaring bull market. This makes it easier for Promoters ( with previous track record ) to approach IPO directly….and fetch the best valuation for their shares thro highest price discovery enabled by book building. VC’s often complain that the stretched valuations often commanded by promoters leaves little on the table for them to encash by planned `exit on listing’.
Look at what VC’s are busy with today…they invest in travel portals – apparently for want of better investing ideas. Just as in stock market, there’s a herd syndrome here…One VC follows what other does…not much different from what mutual funds did ( and suffered ) in 2000 – every portfolio mirrored the other and all went downt the tube for five long years.
An angel becomes one when he spots a great idea early on and rewards the promoter with a premium valuation. It’s this Cherry picking skill one needs to develop to be a successful angel or VC…..For that, VC has to cultivate a practised `gut feel’ which locks him on to a brilliant idea when he sees one and…..widen his span of attention from the fashionable ` Oh, I give just10 seconds for a biz plan’ and learn to do due diligence….!
And that’s the ol’ fashioned way of investing….Full circle.
Krish
The idea is definitely interesting and particularly relevant in the Indian context both for social entrepreneurship and regular entrepreneurship.
Saurabh Srivastava and I were planning to meet mid April to brainstorm on a “Social Elephant India Fund” and this could be useful input.
At PayPal a lot of early users who loved the model and evangelized it wanted a piece of PayPal and in my opinion deserved it. However, there was no enabling mechanism.
Regulations could be a big stumbling block in the for profit area but it could be easier in the not for profit area.
Balaji
Not sure if the charity funding model is workable. VCs are not purely a source of money. The choice of companies to invest in requires significant expertise, as also the process of managing that investment. So if charities wanted to do this, they would have to anyway replicate that capability.
The consumer led internet funding model solves this issue by connecting the consumer directly as an investor… somewhat like supplier financing in b2b space, except that this one does not set any strategic obligations due to low exposure to any single investor/customer.
Alok
I got one very good thought from a workshop that I attended where a VC quipped that the VC industry was because the entreprenuers were created and it is not the other way around as it normally appears to. You post refenerence is a clear illustration of this.
VC 2.0 is nothing but a corollary of Entreprenership 2.0 ( one of the many instance is Web 2.0) . If day by day it is becoming cheaper for an entreprenuer(LAMP, RoR) to build a business then he would not want the deal size that a VC wants to do so naturally the VC business also needs to change.
Alok probably the examples that you are talking about is peer production in VC industry.Peer production in finance(VC industry included) is going to bring in disruptive changes, Some examples of such in other areas of finance are Zopa-www.zopa.com(US), Prosper-www.prosper.com(UK)
There are some issues in these peer production models which needs to be addressed (key one is adverse selection) before they can take off large scale – smart entreprenuers will as usual solve these kind of problems in usher a new better world.
Btw there are other big changes also that can be included in the VC 2.0 change. For example unbundling of Advisory and Financial Capital in the VC Capital.
Cheeers,
Rajan
http://rajan.wordpress.com
In India VC market is not significant thus far in the context of reforming them. There was an interesting comment on by howard lindzon about charities funding the startups and reaping the benefits directly.
This kind of charities funding startups can actually be a working model in India culturally – successfyl ones will payback manytimes over sooner or latter.
100 years back charity money was directed towards education which made a huge difference to the society. Now education(at all levels) is increasingly a viable business propostion – though inclusion is missing. The charities now can deploy some of their resources to fund startups.
There can be several advantages to this model. One most important being, flattenning the boom-bust cycle so characteristic of VC driven model.
Agreed, there are more questions than answers. If the charity driving the startup model is to be given a chance, it must be now, well ahead of the VC market hots up in India.
Cheers.