Unfortunately, today’s early stage venture investing market is a little bit like following Tiger Woods on the golf course. This trend makes it extremely difficult for new innovative ideas to grab the attention from their desired audience. While there are hundreds of world-class golfers playing on any given weekend (who are plenty entertaining to watch), once the crowd following Tiger roars, everyone turns their eyeballs to Mr. Woods (even when he’s 6 strokes back). Because of the inherent high risks involved, the investing community is so susceptible to this herd mentality; when a top tier firm or individual invests in a space, it seems that everyone follows.
These “me too” investments lead to businesses, which often are inferior to other start-up ventures, receiving full funding simply because they operate in a space that has garnered some interest from the recognized big boys (i.e. Sequoia, Kleiner Perkins, Greylock, etc.). Is this playing it a safe or just playing it stupid? If innovation is going to solve the problems of tomorrow, do we really need investor dollars going to yet another video streaming site with a social networking component that’s primary revenue model revolves around advertising?
Another problem with the industry is that it has become entirely too incestuous, with the top firms and individuals pouring larger and larger amounts of money into only a very small percentage of the companies that actually need it. As VC funds have grown, so has the size of their investments, leading to a “handful of big bets” mentality that leaves a lot of promising early stage companies standing in the cold. Although placing large chunks of capital into ventures with established traction is valuable (and lower risk), it also means true innovation is being left on the sidelines when it should be cultivated in an efficient manner. We don’t need seven great new companies right now; we need seven hundred. Young stars who are new to the game are being overlooked for individuals with more experience, not necessarily because it’s the experience that makes their venture better, but simply because they know someone who can get them money.
“The real issue is that getting financing is difficult and inefficient for the investor. I’m having to create a whole slew of personal relationships, networking, etc… – just to get small amounts of money. While I like being social and getting out there, it’s slow. We need a Wal-Mart model for “common’ money” (i.e. under $500k using a typical business model). The real issue is that many people could be funded so much more efficiently, with better returns, if the industry was more transparent.” – Adam Nelson, Founder of varud.com
While investor attention is being paid to the Tiger-like entrepreneurs and ideas of the world, the next great phenom is sitting on a hell of a smart concept and still waiting to be discovered. How can this talented bunch break through and get some time on the field?