Entrepreneurs and Venture Capital

I promised Michael Markman I’d write about this Kevin Burton post. Which is actually a response to a Michael Arrington post about this generation of entrepreneurs.

Arrington says any entrepreneur who has been through the dotcom bust is risk-averse, and that’s why they don’t take venture capital.  Burton, who founded Tailrank and bootstrapped it, says he didn’t need it and that VC is the last money an entrepreneur ought to take.

I spent the last few days at AlwaysOn’s Venture Summit West, and I actually have a few coherent thoughts on this subject. Here they come:

Many companies, especially software companies, don’t need venture capital and shouldn’t take it, because it’s dilutive and distracting.

But it has nothing to do with risk aversion.  It has to do with need.  Why do you think the VC industry started with semiconductors?  Why do you think it has gone toward biotech? And greentech?

Not because entrepreneurs in those areas want to change the world by building huge companies and software/Web2.0 entrepreneurs don’t.

It’s because those industries are capital-intensive, either because of clinical
trials or because of manufacturing issues in order to scale.

Seems simple to me: capital-intensive businesses should take capital, and non-capital-intensive industries shouldn’t take it just to take it.

And yes, VCs try to force internet entrepreneurs to take their money because there IS an inherent conflict of interest between entrepreneur and VC.  The VC is there to get a return on investment, and if Facebook is the easiest way to get it, they will force money on Facebook. It doesn’t  mean anything about the entrepreneur, except young entrepreneurs don’t know much about the intricacies of money and are more vulnerable to this conflict of interest. It doesn’t mean that experienced entrepreneurs are more risk averse.

Most of the VCs at the Summit admitted that they prefer an experienced entrepreneur (especially one who has failed) to a novice.

And Jeez…if you don’t learn from your experience, you are not even a dog.