VCs invest in businesses that have the potential to go big and at the same time, given them a handsome RoI within a few years (maybe a short cycle?). VCs judgment (of understanding a business, from a typical MBAish perspective) has been questioned umpteen number of times and here are a few stark realities from the VC investments (happened in US, 2001-2009 period) that speaks of the model:
- # of VC-backed companies started: 24,100
- # of VC-backed companies with exits over $100m: 750 (3%)
- # of VC firms: ~850 [source]
In short, the number of significant exits are lesser than the number of VC firms!
‘Tourist VCs’ – that’s the term used to describe VCs who are in for a quick run (without strong fundamental) and mostly bring a bad name to the ecosystem. [Please note that ‘Tourist VCs Go Home’ is a famous quote by Mike Moritz of Sequoia Capital]
The VC model essentially is broken (mostly by tourist VCs) and if you look at Indian market, you will come across many of these ‘Tourist VCs’ as well as ‘Tourist Incubation Centers’ that are trying to make a quick buck (learn on others expense) from startups.
I agree that we do need a different model and experimentation is the key, so my sincere suggestion to entrepreneurs- do ask tough questions to VCs/Investor/Incubators/mentors on the value they bring to the table.
In short, don’t be cynical (about VCs/mentors etc), but just be-aware of them. Ask, ask and ask!
Do your own due dilligence.
Highly Recommended Read: “Why should I marry you?” and other questions to ask VCs (during fund raising process)