One argument for venture capital returns being, on average, better in the earlier days of the industry is the relative lack of capital combined with entrepreneurial ignorance about how to negotiate or structure terms.
As the venture industry matures, however, this argument no longer holds water. Although the proportion of money committed from non-government limited partners to independent venture capital funds continues to fall from its highs around the turn of the millennium, there has been growth in money flowing from other types of investors, from angels and family offices to financial investors making direct commitments and on to corporate venturing.
The amount of money chasing the best entrepreneurs has increased just as the supply of information to first-time entrepreneurs increases in quality and volume and the number of serial entrepreneurs has also increased.
The asymmetric levels of knowledge that once characterised private equity more broadly, between relatively ignorant management and sophisticated fund managers, has narrowed.
I sum up what the sophisticated entrepreneur is looking for as "the 10 commandments" (see box below).
For corporate venturing units, working out where they stand on these 10 points will help them appeal to the best entrepreneurs and also help them choose their own syndicate partners.
These commandments are drawn from my own experiences as founder of companies such as ISI Emerging Markets and Interactive Investor – sold and floated respectively – and also currently being an angel investor in 40 companies.
The old order of venture capital firms automatically leading rounds and squeezing down or out others no longer applies, and relationships formed in the broader investment community increasingly important. Angels, for example, are increasingly able to follow their companies through to a trade sale or initial public offering – my own portfolio employs 6,000 employees with an aggregate turnover of about $1bn, all from nothing 10 years ago.
The importance of these small companies, and the others like them, cannot be underestimated. Management consultancy firm McKinsey found in a study earlier this year that for every job lost by the new technologies being created another 2.6 jobs were created.
High technology now makes up 7.2% of the UK’s gross domestic product and could hit 10% by 2015, while internet companies make up a quarter of gross domestic product. But these companies need help expanding internationally.
As an advisory board director of business network service LinkedIn for the past five years, I have seen how much easier it has become for an entrepreneur to check the credentials of its potential investors at the individual level.
The credibility and track record of the firm itself can increasingly be compared, the reserves left in its fund examined, but also the person doing the deal and who will be intimately involved in providing connections and advising can be seen.
If a person claims to be able to help a company grow but his community is limited to a few school friends and the overseas au pair, then it is a sure sign he is not part of the future even if there are past successes.
The 10 commandments:
how to get or make a bad investor
1 Choose an investor who has a limited
network of contacts in your industry.
2 Choose a firm rather than an individual
within it as your investor.
3 Choose an investor with no connections in
the US or China if you want to expand into
those markets.
4 Choose an investor without talking to other
investee companies first.
5 Choose an angel investor who has never
previously raised money to chair your board.
6 Choose an angel investor who has never run
a company to chair your board.
7 Choose an investor who has no money
left or restrictions which prevent him from
investing more in your company.
8 Choose an investor whose fund is a poor
performer.
9 Choose not to listen to or communicate with
your investor(s).
10 Choose to delegate the process to someone
else.