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Posts Tagged ‘Trust’

thefunded-logoAdeo Ressi, the founder of the TheFunded.com has joined a long list of entrepreneurs and investors that say that the venture capital industry is broken. However, Ressi decided to put his (didn’t use outsider funds) money where his mouth was and built a site that allows entrepreneurs to critique and rate the actual audience that was evaluating them…the investors.

Ressi argues that airing the venture industry’s dirty laundry will ultimately improve the efficiency of the funding process as well as the rocky relationships that exist between investors and entrepreneurs. TheFunded also allows entrepreneurs to view and share term sheets, to assist one another finding good investors, and to discuss the many facets of operating a business. While many entrepreneurs applaud Ressi for clearing out the cloud of smoke that surrounds the VC world, many simply see TheFunded as only an arena for disgruntled entrepreneurs to vent.

“The problem with sites like TheFunded.com, or any site with user reviews is that the reviewed product will always be at a disadvantage. For every unhappy customer, they tell 9 of their friends, and for every happy one they tell 3. The odds are against the VCs here. Of course the majority of turned away entrepreneurs will put a negative review – it’s a form of vengeance. But those that did have a happy experience will have little reason to post anything. They have already researched for information from the site, got what they were looking for and will not likely return without proper incentive.” Ian Bell, Entrepreneur

Because of this lack of positive reviews, many entrepreneurs accuse the VCs of gaming the system where they’ve asked entrepreneurs they’ve backed to submit a favorable commentary about them and their fundraising experience. This boosts the firm’s rankings on TheFunded’s leaderboard, and has resulted in many in the industry to question the sites credibility.

For example, if a disproportionate number of members enter the site to provide a single comment on a given firm’s profile, this sends a red flag to TheFunded’s system. TheFunded looks for other behavior, too, for example, unusual semantic characteristics of the written fund reviews, such as excessive use of exclamation points and superlatives. It also looks at how many entrepreneurs voluntarily admit they were asked by their VC to submit a review (entrepreneurs are asked this when they provide a comment, and they check a box to say they’ve been asked).

Before this site can truly becomes a quality resource for the start-up community, they’ll need to become more respected (from both sides) by attracting additional traffic and even more helpful reviews to their site (Psst…a new Toyota Prius has over 160 consumer reviews on Edmunds.com compared to just 30 entrepreneur reviews of Kleiner Perkins on TheFunded.com). Unless these numbers pick up, it’s hard to look at this site without some real bias. At the end of the day tough, the TheFunded has definitely made Investors way more aware of their perceptions in the venture marketplace, and if that’s the nudge they needed to become more transparent and helpful to entrepreneurs; they deserve some applause, but not quite a standing “O” just yet.

“If their tool did such a good job, they’d raise a fund themselves and beat the tar out of us.” – Paul Kedrosky, investor & entrepreneur

“It’s a wantrepreneur focused product. Real VCs and real companies with a legit shot at VC money wont use it.” – Jeff Martens, strategic consultant

younoodleThe above quotes are referring to the highly controversial YouNoodle.com, an online platform for start-ups and early stage ventures. The feature that has sparked a lot of debate in the investment community is their YouNoodle Start-Up Predictor that analyzes data on early stage ventures and generates a report on what that start-up will be worth in three years. For real? Yes, they’ve developed a software program that claims it can predict the valuation of early-stage start up companies (yes, companies that haven’t come within a whiff of a dollar in revenue…). The model relies on basically four areas: 1) the team; 2) financial factors; 3) the concept; and 4) advisors. How’s it work? The entrepreneur fills out the survey and provides a little detail, and like pulling a rabbit out of a hat, presto…YouNoodle spits out a valuation. Smells about as real as the future predicting information Miss Cleo (the famous TV psychic and shaman), provided after calling her “900” hotline. misscleo

It’s hard for us to look at this with a straight face. Seriously. Has the venture community been Punk’d? After all, a “noodle” is defined in the dictionary as a fool or simpleton. Can you really believe that two teenagers working on a few lines of code in the basement have developed a $2.75 million dollar idea? Ridiculous. Be very afraid of this tool, looking at some number on the screen followed by a huge string of zeroes right next to the name and your start-up feeds the entrepreneurs ego like nothing else can. Think about the Far Side cartoon where the kids are all eating ice cream in front of the windows of a gym filled with overweight people sweating on treadmills. It’s pretty sick. We think it’s nothing more than a way to grow their real ambition – – yet another social network for entrepreneurs. If it isn’t, then why haven’t their own founding members run themselves through their magical predictor?

The following excerpt is taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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logjamcanoe

The following excerpt is taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

A good presentation with a good PowerPoint given by an individual with a strong personality can easily sway a room full of investors into cutting a check. Investors need to be sure they’re not getting charmed out of their hard earned cash and that the great presentation was great because of what was being offered. Investors need a better mechanism for filtering investments, a standardized venture “combine” if you will. There are simply too many new ventures looking for help and money, and the process for filtering these opportunities is still based on a complex network of personal relationships that will never scale to meet the market needs. As the global economy expands and moves forward, new systems and technologies need to be implemented to accelerate American innovation as well.

As we mentioned, trust is key, so an investor may make a move on a deal because it was given to him or her from a trusted individual (as a favor, for example) even though it may not be the best deal for them. Angel networks provide some buffer between enthusiastic entrepreneurs and investors, but more often than not the Angels are the ones who are doing all the screening work anyway; it’s not as if they can just show up with the confidence that all the pitches they see will be high quality opportunities.

The answer to this problem is pretty simple; look at the entire investing ecosystem and see where there are constraints. Then we need to collectively implement plans that remove those constraints. The systems and technologies are at our fingertips, it’s time we stepped up and innovated ourselves.

Entrepreneurs need to stop jumping in just upstream of a logjam and wondering why they aren’t floating downstream to paradise. Here’s a tip; paddle to shore, load your canoe onto your back, and hike around the blockage, and then put in downstream. Ignore the reams of angry entrepreneurs clamoring on and on about how the market is this or how the market is that, or go ahead and join the masses pushed up against the dam who are wondering what will happen next.

If you’re interested in learning more about how a Venture 360 due diligence engagement can make you a more effective and efficient investor or entrepreneur, please contact us by sending a short email introduction to northventure360@dontgosouth.com and we’ll set up some time to discuss how we can help you avoid the logjam.

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Before the Internet, entire industries emerged that helped investors find “good” entrepreneurs; trade shows, print publications, and an army of investment banking connectors who helped investors and entrepreneurs find each other (for a chunky fee of course). You can spend half your career (and life savings) at trade shows and more often than not all you would have to show for it would be extra airline miles and a desk drawer full of name badges.

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Today’s investors rely more than ever on their personal filter of trusted referrals and connections with friends. Tip: trust is not earned swapping cards at a trade show booth. Just because you shake hands with an investor doesn’t mean he’s ready to give you a giant check. This traditional process of finding entrepreneurs needed to evolve, and in some senses it has. Thanks in large part to the Internet, investors are buried in new business plan submissions.

As of this writing, there are over 37,000 business plans on AngelSoft.net, over 100,000 plans on FundingPost.com, and over 6,000 plans on FundingUniverse.com. Sounds great for investors, right? But let’s take a closer look at the math: If an investor tried to review all these plans for 30 minutes each it would take over 34 years reading non stop for 8 hours a day, 5 days a week, for 52 weeks a year.

Where’s the Brita water filter for business plans when you need it? Out of those 143,000 plans described above, how many are actually high quality, better to digest, “investor-ready” ideas? Investors are thirsty for exciting opportunities, but they’re not quite ready to wrap their mouths around a fire hose. As for the entrepreneur looking for a leg up, blasting your business plan out to several thousand investors with the click of a button is about as strategic as buying a Powerball ticket.brita

The Internet has created a massive pool of investment opportunities, which has shifted the real problem from an issue of quantity to throughput and yield.   Adding another 140,000 business plans to the un-harvested fields of internet “pitch farms” will not increase yield any more than it already has. Angel investors are already using this huge pool of business plans and their throughput has likely increased by an additional 10 or more deals per month at most.

But while this increase in reviewed applicants should lead to slightly stronger funding candidates, the overall problem is still NOT being solved. In fact, the minimal gains from reading a few more plans each month doesn’t actually increase the number of deals that an Angel group can seriously evaluate or fund. That number (based on their in house resources) remains constant no matter how many ventures are knocking on the door.

The cold fact is that most investors still won’t even glance at a business plan unless it’s gotten a referral from a credible third party. It’s not only about who you know, it’s also about how you know them. Entrepreneurs and business plans referred by others who have proven to be good filters for garbage ideas, often float to the top of the pile. How else do you expect investors to filter through 34 years of reading material? Everything else usually gets dumped into the circular filing cabinet. Today most investment deals come down to personal TRUST, which is pretty hard to create in a virtual world.

Websites like Linkedin are useful tools for examining a person’s work history and experience, but they are not a substitute for one on one interviews and the ability to make an objective investment decision. Characteristics like work ethic, ability to handle risk, verbal skills, and attention to detail are learned through personal interviews, not back and forth emails.

It does, after all, take the same amount of time to read a bad business plan as it does a good one, and even on the top funding websites (though they’d probably dispute it) there’s still not an effective way to filter out all the junk. As an investor, becoming a member of a small Angel group that exposes you to “quality” investments usually costs money (annual dues), and more often than not, you end up doing all the deal review work anyway. So, what are you really paying for? If you’re going to pay to join a social club, join the country version, at least you’re guaranteed a good tee time and some exercise.

Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital. In the coming weeks, we’ll be posting even more insightful nuggets from this paper. However, if you’d like to read & download all 33 pages of constructive prose right this moment, it’s sitting on our website: www.dontgosouth.com.

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