How do we conclude Amateur Hour? Because returns just suck. As I recall, in 1994, the fastest 'water heater' mainframe had a processor clock of about 150 MHz and sold for maybe $1 million. Now can get a cell phone with a clock about 10 times that fast for less than $100. More generally computer hardware has gotten POWERFUL and CHEAP, both VERY quickly. Similarly for infrastructure software and the Internet.
Still, on average returns suck. Shocking situation.
How do we conclude returns suck? Can look at VC Mark Suster's blog 'Both Sides of the Table' and in particular in
"The Coming Brick Wall in Venture Capital & Why This is Good for US Innovation"
by Mark Suster on June 30, 2011
at
http://www.bothsidesofthetable.com/2011/06/30/the-coming-bri...
with a graph showing the big rise and bigger fall in the number of VCs with claims that some VC funds have not been able to return to the limited partners even their original investment, i.e., have lost money in every sense, and in
"What’s Really Going on in the VC Industry? What Does it Mean for Startups?"
by Mark Suster on July 16, 2010
at
http://www.bothsidesofthetable.com/2010/07/16/whats-really-g...
with a table on big declines in university endowments, the declines because of or at least in spite of investments in VC funds.
For evidence of Amateur Hour, the article has a lot on the VCs. My view is that even if they got a nice description of 'another Google' in their e-mail in-box, they would ignore it.
To me, it looks like the VCs are consistently the dumbest people in the room. They are not the people I respected in graduate school or at Yorktown Heights and are nearly never someone I would hire as Chief Scientist, CTO, CIO, Software Manager, Software Developer, User Interface Designer, DBA, Server Farm Administrator, Network Architect, Network Analyst, Network Manager, or CFO.
Beyond the bad financial returns, here is one point of evidence: As we can see in the article, often the VCs think in terms of simplistic and nearly meaningless patterns. What they appear to be looking at, believing in, and acting on is evidence hardly better than tea leafs. Even more seriously, in IT (the situation in biomedical might be much different) the VCs don't have even as much as a weak little hollow hoot of a tiny clue what to look at or how to evaluate projects. Borrowing from a movie, "They are digging in the wrong place.".
For more on the patterns, there is "Cold-calling our office line.". That this is bad is definitely looking at patterns in tea leafs and as silly as the evidence, say, in 'The Music Man' of a boy buckling his knickerbockers BELOW his knee. Even more seriously, it is usually just crucial to 'cold call the office line' to pass a message to the VC that did send an e-mail; the VCs are so bad at handling e-mail that otherwise the e-mail is almost surely due to RIP in the bit bucket.
More evidence is in the "Saying they are completely unique, and that there is no competition. Groan.". Groan back to you, doofus. VC, if you are reading this and are insulted, fine with me: No good IT entrepreneur should dare to have you on their Board.
So, a standard VC claim is "Whatever idea you have, at least a dozen other people have had the same idea and are working on executing it.". Let's examine this claim: So, for an idea, take all the people so far who have thought of it and, for each such person, take the time and date when they first did think of it. Now, sort that data into ascending order on time and date and look at the first person from the sort; almost surely (probability 1) that person thought of the idea first, before anyone else, and, thus, is a contradiction to the claim. Done.
More generally, the claim is just nonsense: Indeed, essentially all of peer-reviewed research is judged on the criteria of new, correct, and significant. If there were no new ideas, then there should be no new peer-reviewed papers, but each year there are many thousands of such papers. Moreover, over nearly any 10 year interval, we can find very powerful, new results we would not want to be without.
So, the VC claim of nothing new is uninformed, misinformed, ignorant, arrogant, and just plain wrong.
Really, the claim is from a strong desire of a VC to trivialize and denigrate entrepreneurs and their work. For the poor returns, we have just identified one sufficient condition.
Similarly, a common VC claim is, "Ideas are easy. Execution is hard.". No, good ideas are hard and then successful execution is routine!
Execution? The US is just awash in millions of businesses, coast to coast, on Main Street that do execution quite well, thank you. The US is also awash in people who have done well managing groups from a dozen to 1000 dozen persons in, say, business, government, the military, etc. In the US, good execution is common.
Good execution is so common that even VCs can understand a lot about execution. Moreover, in the work of a CEO, execution is about all the VCs understand. So, the VCs are willing to say that what they do know, execution, is difficult.
But the VCs definitely do NOT understand finding good, new ideas and, thus, dismiss that work as "easy". Dumb. Part of the reason for the VC problem with 'ideas' is that one could count with shoes still on all the VCs in the country who have published a peer-reviewed paper in an archival journal of original research or who are qualified for a tenure track faculty position in a technical field in a research university or as a problem sponsor in NSF or DARPA.
Then there's the common "Using a banker to raise money or sending in something over the transom (cold e-mail). Good entrepreneurs can always find a warm intro to a VC."
So, it is common on venture firm Web sites to advise an entrepreneur to get an introduction via a lawyer, banker, or VC portfolio CEO. So, this VC wants to rule out any entrepreneur who gets an introduction from a banker.
Next, the "over the transom (cold e-mail)" is another favorite way for VCs to denigrate the work of entrepreneurs. That denigration is just posturing, playing 'hard to get' because as is easy to see for nearly all VCs it is easy enough to get their e-mail address and phone number, send them e-mail, and leave them a phone message.
The worst is the "Good entrepreneurs can always find a warm intro to a VC." Nonsense. Total 100% reeking, fuming, bubbling, sticky, toxic nonsense. Here VCs are breaking their arms patting themselves on their backs about how 'well connected' they are. Nonsense. Also they are asking their 'friends' to do their work for them. In fact, VCs are very poorly connected with some of the very best sources of 'good' entrepreneurs! I met and worked with a lot of 'good' people, some who became good entrepreneurs, in graduate school, as a university professor, and at Yorktown Heights, but in those places I never met anyone who became a VC. In particular, VCs are NOT very technical and, thus, are not well connected with entrepreneurs with high technical qualifications.
Actually, we know a lot about how to conceive of good, new projects to field valuable results to markets. There is a long, astoundingly successful history of such projects in applied math, applied science, engineering, and technology, and IT, in both business and the US DoD. The VC simplistic, ignorant pattern matching is ignoring this history. Dumb.
Here is a fact that should wake up each VC like 50 gallons of ice water over their heads: Look at the 'home run hits' of the past few decades and see Apple, Twitter, GroupOn, Facebook, Google, Yahoo, Cisco, HP, Oracle, Dell, Microsoft, Intel, Sun, IBM. Now, find the 'pattern' in these! May I have the envelope, please? Here it is: The pattern is, there isn't one! Instead, have to look at such case one by one. More generally, fundamentally, nearly necessarily, are looking for things that are NEW. Sorry 'bout the difficulty of working with things that are new!
The VCs, then, have been blinded by their 100-200 daily e-mail messages: Their job is to find golden needles in a lot of straw, but their 'pattern matching' is based on what lessons they draw looking at the straw and not the needles.
Really, nearly all VC remarks on what they want is nonsense to cover over what they really want. What they really want is an opportunity to make a lot of money easily. Their main idea is to wait for an entrepreneur to do really well but start a vast project with half-vast planning, run out of cash, and be willing to take a VC check with some really onerous terms. So, fundamentally they are eager to pursue 'vulture capital'. But, vultures eat dead meat and, net, are not very successful.
This VC business model is not working well. Reasons:
(1) The VCs evaluate the projects not at all like a serious CEO would but much like an accountant would. E.g., the VCs want to see 'traction' significant and rising quickly. That's about as deep into anything meaningful as the VCs get. So, really, the VCs look at an egg or a chick without enough 'diligence' to tell if the species is a chicken, pigeon, or eagle. Dumb.
(2) The VCs are looking for projects that DO have 'traction' but also have some poor planning. NOT good.
Thankfully for US national security, VCs are not NSF or DARPA problem sponsors!