I have a great deal of respect for angel investor and entrepreneur Martin Varsavsky, however, I disagree with a recent post on his blog. Martin suggests venture funds should stop investing in new startups. Instead, Martin suggests investing fund capital into stocks of top tech companies that might provide larger returns over the next 18 months:
“I would put half of the remaining funds in the top tech stocks and the other half in start ups further rounds. As far as new start ups, I would get out of that business altogether for a while. We know what happened to Bush we chose to go into Iraq before succeeding in Afghanistan. Overstreching is bad.�
VC funds shouldn’t and wouldn’t ever do this. Despite the fact that a true venture fund can’t legally pull capital to invest in stocks, it also doesn’t make sense. No VC invests on an 18-month time horizon because they want a minimum 10x return, not 1x. It’s about building long-term value over time and selling for a big payout, not a quick flip. The approach to venture investing is in some ways the antithesis of the stock market. Venture is about investing in people you know and trust. It’s about investing in areas of domain expertise. Why risk the manipulation of the market when you can make smart bets on businesses where you sit on the board with a window into day-to-day operations? Stocks? Not so much.
The doom and gloom meme is getting old. The bottom line is that the landscape for innovation potential hasn’t changed and the best VC firms and angel investors know this. If you’re a startup founder without a business model, without an ability to eat ramen or think outside the box, you’re going to fail no matter the economy. If you’re a VC stuck with portfolio companies with excessive burn rates and enormous valuations, same deal. I take issue with anyone discouraging the availability of capital for new upstarts because we should be investing in value creators, not value buyers. I’m glad to see angels like Dave McClure, Ted Rheingold and Auren Hoffman stepping up.
