Is venture capital model no longer working?

The money manager mentality also meant that VCs became risk averse

KUALA LUMPUR: An expert on venture capitalism is of the opinion that the venture capitalist model is broken.

NOT BEYOND REPAIR: Green believes that the VC model is broken but it can still be fixed.
 
Jordan Green, chairman of the Australian Association of Angel Investors, said the latest generation of VCs has not been delivering results.

"Up until the mid-90s, VCs could reap a double digit return on investment on the companies they invested in," he told Bytz on the sidelines of the Asian Business Angel Forum (ABAF) 2012 here.

Green said today's VCs fail to do better than their predecessors because of their money manager mentality, and they aren't capable of advising entrepreneurs on how to viably commercialise their products.

"Venture capitalism predicated on the idea that people in the VC firm would be able to help the startups they invest in to grow effectively. But you need to have business experience to do this, " he said.

According to Green, many of today's VCs have the academic qualifications but not the experience of having run a business.

This situation arose when VC firms started to institutionalise, to give themselves bigger funds to work with, he said.

However, as the establishments got bigger, there was not enough qualified people with the right business experience to hire.

"As a result, those without any entrepreneurial skills could not properly help the startups move forward," Green said.

"And the money manager mentality also meant that VCs became risk adverse and would only fund startups when they started being profitable. This created the 'VC gap.'"

The gap is where entrepreneurs have difficulty getting funding between starting up and starting to show profitability - the period when VCs are most needed.

Green believes investing in a business requires empathy, and is not merely an intellectual exercise.

Malaysia is moving in the right direction by starting angel investor networks because this will give startups here an alternative to VCs when they need funding for their fledgling products and services, he said.

"Angels are actually replacing the VCs of yore. They are the experienced business people who can advise entrepreneurs on how to bring their products to greater heights," Green said.

The Malaysian angel investor network is still young, with two known agencies - the Virtuous Investment Circle and Pikom Angel network. Another is set to emerge later this year and is called the Malaysian Angel Business Network.

However, Green said, the VC model can still be saved if venture capitalism returns to its original investment model.

He said this will require braver institutional investors and a better understanding of how VCs should work.

"With the original intent and model, they can make better decisions and better help startups grow faster," he said.

ABAF is organised by Cradle Fund Sdn Bhd, which manages an investment programme that funds technology startups in the country.

The forum is aimed at bringing the best of Asia's angel investors, venture capitalists, decision makers, policy leaders and entrepreneurs to one location. Some 500 delegates gathered to hear 30 speakers at this year's event.


By JO TIMBUONG bytz@thestar.com.my