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