Where Have All the Bold VCs Gone?

pirate-creek.jpgAs startups become cheaper to launch, more and more venture capitalists are finding themselves left out in the cold. Either angel investors are beating them to the punch in funding new startups, or Google buys them before any VC even gets to hear the company’s pitch.

In fact, angels invested $26 billion in startups last year, nearly as much as the $29 billion invested by venture firms. However, there is growing gap between the $20K to $100k most angels will put in and the $2 million to $3 million that a venture firm will commit. Paul Graham, chairman of the Y Combinator investment incubator, argues that what startups need are more investments somewhere in the middle to fill that gap. Most Web startups don’t need $2 million. They need $300,000 or $500,000. But most venture capitalists don’t think those types of investments are worth their while.

In a post about why we are not seeing any more Googles, Graham is scathing in his criticism of venture capitalists, who seem stuck in their old ways of thinking. According to him, most venture capitalists wouldn’t know a good idea if it landed on their head. Excerpt:

I used to think of VCs as piratical: bold but unscrupulous. On closer acquaintance they turn out to be more like bureaucrats. They’re more upstanding than I used to think (the good ones, at least), but less bold. Maybe the VC industry has changed. Maybe they used to be bolder. But I suspect it’s the startup world that has changed, not them. The low cost of starting a startup means the average good bet is a riskier one, but most existing VC firms still operate as if they were investing in hardware startups in 1985.

They’re terrified of really novel ideas, unless the founders are good enough salesmen to compensate.

And yet it’s the bold ideas that generate the biggest returns. Any really good new idea will seem bad to most people; otherwise someone would already be doing it. And yet most VCs are driven by consensus, not just within their firms, but within the VC community. The biggest factor determining how a VC will feel about your startup is how other VCs feel about it. I doubt they realize it, but this algorithm guarantees they’ll miss all the very best ideas. The more people who have to like a new idea, the more outliers you lose.

So where have all those pirate investors gone? I’m sure there are still a few of you out there hiding in the coves.

(Photo by Midnight Creek).