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September 22, 2009 / Danny Robinson

VC is not broken – Anymore. Digital Media’s new funding models

I was a having coffee with a VC colleague last week.  This is someone I respect, and hope will fund some companies graduating from Bootup Labs.  I have probably explained Bootup Labs and why our investment model works to this individual on at least 7 different occasions.  It turns out that it took 8 times to get the ‘ah-ha’ that I was so patiently waiting for.  Up until then, I just didn’t think he liked the idea.  I’m happy to say, he is now a believer.  But, as any good entrepreneur would do, I immediately reviewed the other 7 pitches in my head — searching for the flaws that made it so difficult to inject the concept into this guy’s brain cells.  Could it be that he isn’t staying up to date with the VC industry? Is he not reading the same blogs, following the same people on twitter that I am? Is he not talking to entrepreneurs at the seed stage, flying to meet the thought leaders in the space, or engaged in local startup community?  And if not, why isn’t he, or more importantly, why was I?  Perhaps I was the one missing something; Maybe there simply isn’t a return-on-time for those activities.  Who am I to judge?  Maybe the status quo is simply good enough?

The truth is that the status quo is good enough for bio-tech, clean-tech or any other capital intensive, high risk, high reward company, which is why you see many VCs move toward those sectors and away from investing in digital media companies.  Internet companies quickly have become low capital, lower risk, investments, but can still have some pretty big exits.  Basically, if the companies you invest in don’t need very much money, then you don’t need to raise large funds, so the 10-2-20 model is officially broken.  (10 year fund, 2% fee on capital under management per year, plus 20% of proceeds paid to management)  If you don’t have a large fund, the 2% management fee doesn’t add up to enough to pay for the fund’s expenses. Plain and simple.

I touched on the concept of a broken VC model over a year ago, and since the economic down turn, it’s been talked about by a plethora of notable industry insiders. But, since then, I’ve learned a lot about the inner workings of the venture capital world, and one thing is for sure: Investing in Digital Media companies (Consumer Internet, Enterprise Internet, Online Gaming, and Mobile Software) requires a new model.

It wasn’t until my 8th pitch to my VC friend, that I defined what “lower capital requirements” means in real life.  It means that some of these companies will never need to raise a series A and most will not need a series B.  On top of that, these companies are exiting within 2-5 years at a rate of 25 exits/month.  This formula has changed so much and so fast, it caught most of the industry off guard, and if they’re not paying attention, they’re paying the price.

The Bootup Labs model is unique, even among our well established peers.  There is TechStars, Seedcamp, Extreme University, Launchbox, YCombinator, etc who all invest around $20k in each group of founders and provide a great deal of support and connections for around 3 months.  Then there is Union Square, CRV, FirstRound, SoftTechVC, etc who typically invest $250k-$1M. We feel the sweet spot is a TechStars-like, mentorship driven program for founders, but instead of focusing on getting them seed funded, we invest $150k and give them 8 months to get their company to at least “ramen profitable“.  After that, they can choose to raise a larger round or continue to grow their business organically.  Their success does not rely on upstream VC support, but many will probably choose to take it anyway as a way to accelerate their growth.  If you happen to be a VC, don’t worry, there will still be plenty of deal flow coming your way.

View this Google Spreadsheet to see how the Bootup Labs Fund makes money, and if you’re an investor, please contact me.

Subscribe to these guys if you want to get caught up.  Their twitter addresses will be listed on their blog too.  Follow them (and us).  Use an RSS reader.  But better yet, start your own blog, comment on this post, and start tweeting out your thoughts.  We’re listening!

The truth is that the evolution of this space is still evolving at an enormous rate.  More on my predictions in a subsequent post.



  1. James / Sep 22 2009 4:53 pm

    Good post, Dan. Nice to see folks are starting to hear your message. You're finding your own product-market fit!

  2. lynda / Sep 22 2009 9:33 pm

    Beautifully summarized – so much knowledge sharing that needs to happen on both sides. Thanks for this contribution!

  3. Aaron Hilton / Sep 23 2009 3:18 am

    Nice! Thank you Danny for laying down the real numbers and common sense. This is what I'm looking for, right on for finding it.
    Haha, ramen profitable is an awesome way to define success. 🙂 Once you get there, you're motivated like hell to keep 'er going.

  4. @basilpeters / Sep 23 2009 2:19 pm

    Great post Danny. I don't think anyone would argue (anymore) that the traditional Venture Capital model is broken. So many big thinkers have agreed on that over the past year that its an accepted reality now. This is a list of just some of the good articles on why the traditional model is broken:

    What I think you are saying is that there is a NEW model for venture capital (no longer capitalized). I agree – it's an extremely exciting time for entrepreneurs. What you and Boris are doing at Bootup Labs is part of the renaissance. Keep up the great work.

    • DannyRobinson / Sep 24 2009 12:49 am

      Funny you say that it's an accepted reality. I just received an email from someone about the post (By the fact that responded by email tells they prefer to remain nameless, which I will respect.) This person feels that it's all cyclical and the bubbles are not reality. Steady state is 5-7 years to invest, build and exit a company, and that the model works fine. People are just not happy with the fact they're not getting bubble returns anymore. (I'm paraphrasing here)

      My take: VC is should be sector specific in the short term, but sector agnostic in the long term. In other words, and what I tried to say in the post, is that traditional VC is broken for Digital Media. So, it's time for VCs to "Jump the Shark", and focus on sectors that work for their model. Clean Tech for example.

      No one has lived through an environment that we have now: Where it costs so little to get a company up and running, profitably, and have exits for those companies so high at the same time. For us, there is just a TON of opportunity for investors to make some big returns.

      • @davidshore / Sep 29 2009 5:34 am

        I couldn’t agree more. Great post Danny, nice to see this follow up.

        I’ve always had a problem with the notion that the VC model is “broken". The environment has changed and the industry needs to move with it. Just like the ventures they invest in.

        It is clear there is too much capital chasing too few deals that don’t need nearly as much money as they did when the funds were raising so much capital. This will take years to shake out. Probably more than one fund cycle of 7 to 10 years.

        It’s also clear that some sectors like bio-tech and energy-tech still require lots of capital and are chasing huge payoffs. The old model still works in those sectors.

        But in sectors that need less capital than they did ten years ago, the VC model needs to change. In the past it took an enormous amount of capital to build companies that develop infrastructure. Today the infrastructure is built out to the point of near commodity, so investors need to adapt, like invest in those that use that infrastructure – web services, SaaS, PaaS, etc. They need less money and exit faster.

        And exit by way of M&A rather than IPO, which also serves the smaller investment better. VCs can find plenty of ways to make their target returns with exits of $100m. The M&A market is far less cyclical than the IPO market anyway.

        Some VCs will change with the cycles and others won’t, but saying the industry is broken is suggesting the model can’t change. The industry certainly can adapt and for many firms, like Bootup Labs, the firms behind many of the comments to this post and the new funds you mention, change is happening. VCs need to change just as much as the technology they invest in. The good ones will thrive and the poor ones will dive. But that doesn’t suggest the model is broken. As you say, that represents “a TON of opportunity for investors to make some big returns”.

        Its also great to see the momentum you and your team are creating at events like Launch Party. Thanks to you all

  5. @bwertz / Sep 24 2009 12:19 am

    Danny, agree with your take on the situation and am glad that BootUp Labs is taking a lead in the Vancouver market on defining new VC models.

  6. Brad Feld / Sep 24 2009 5:19 am

    I got into a version of this discussion tonight with a VC who started in the mid-80's. He was unbelievably negative, cynical, and somewhat hostile about his assertion that the VC model was broken, that VC didn't work anymore, and that there was no real reason for anyone to do venture capital. Of course, when I asked him if he was going to shut down his firm and return all his uninvested capital to his LPs, he said "of course not but I am thinking about retiring."

    I found him continuing to assert things in generalizations about "the industry". When I tried to decouple the discussion about "investing in early stage tech companies / helping entrepreneurs create great things" from "the VC industry is broken", I couldn't get him to separate them. Everything came back to the macro – "it's broken."

    I don't like the macro generalizations. There are continuous changes that are out of my control and some that are in my control. I try to focus all of my energy on the stuff that's in my control and deal with whatever context I find myself in. Unfortunately, I think way too many VCs (and entrepreneurs) spend their time worrying about things outside their control.

    In the case of Bootup Labs (and what we do at TechStars, as well as within my VC firm – Foundry Group) we try to put as much energy as we can against things we can impact. Simply by DOING Bootup Labs, you are living this, whether or not the actual "long term VC model" is broken, it's a cycle, or something else that no one has figure out yet is going on. As you know, I think what you are doing is great and am a strong supporter regardless of whether the VC model is broken!

  7. David G. Cohen / Sep 24 2009 5:36 am

    I'm thrilled to see more high quality, well-intentioned programs like Bootup Labs getting going.

    The fundamental difference in what you're doing vs what we do at TechStars is that you're taking an incrementally larger (though still relatively small) risk at the early stage, betting larger dollars earlier. TechStars bets small dollars and says "prove it, and quickly!".

    It's key that you're taking a mentorship-oriented approach. The bottom line is that programs like Bootup, TechStars, etc support and develop an ecosystem and provide an outlet for experienced entrepreneurs to connect with new ones. Sure, this makes for better companies due to the help they receive and that's great. But I think the long term benefits are what most people misunderestimate. 😉

    Keep up the great work!

  8. @kentgoldman / Sep 24 2009 6:28 am

    Even as VC (at First Round Capital), I'm always surprised that the state-of-the-state discussions around funding models tends to focus on the VCs rather than entrepreneurs. Let's shift the orientation. Rather than bemoaning the breakdown of the VC funding model, let's celebrate health of the start-up model. It's never been better.

    On demand services have shifted the enormous fixed costs needed just to build and test a into a variable cost. It used to be venture funding was required to test an idea, now a Visa card and an Amazon account is enough to fund a test infrastructure. User feedback cycles are quicker than ever too.

    This means that starting a technology company, while still incredibly daunting, is more accessible than ever before. More and more would be entrepreneurs will have the chance to pursue their ideas. With the great work you are doing at Bootup Labs (like David & Brad at TechStars), entrepreneurs are better equipped than ever to build great businesses. This translates to more refined ideas and better leaders for the VCs down the line. Something must be working!

    The next time someone bemoans the broken down VC model, let's challenge them to say what they really mean: the start-up model has never been healthier.

  9. Chris Fralic / Sep 24 2009 12:40 pm

    Just as there's a market opportunity for seed stage institutional investors like First Round Capital relative to traditional Venture Capital, I'd agree that there's an opportunity to innovate and provide incremental capital to companies that fit the emerging incubator stage. By the way, I'd add another firm to your list of great incubators – in Philadelphia – they had a great crop of companies in their last batch and have built a strong program and team. I think the industry is healthier because of efforts like yours, and we look forward to working with you and your companies.

  10. Jim Charlton / Sep 25 2009 6:22 pm

    Good post. I think the model you and Techstars are working on fits very nicely with the digital media business. At the end of the day its success relies on the quality of the product and folks building these new companies. As for regular VC, I think the comments about the model being broken is only true because the industry has been completely warped by a four-five year span called the tech bubble. Huge funds developed bringing in new people who could invest in a start-up and sell at huge multiples in 3 years or less. This miraculously become the "norm" in vc business. I would agrue that this is not nor has it ever been the "norm" – it was a very profitable abberration. I have been around long enough (some would argue too long)to have gone thru three separate cycles. VC takes 5-7 years to take an early stage company, build it and then exit once revenues and profits are such (or it is strategic) that a good multiple is justified. Smaller funds, lower amounts of capital, realistic values make it work. Maybe I'm old but what I am seeing today is back to the original vc – that means different expectations and different structures. Unfortunately, most people in the industry today believe 3 year, big multilple exit and big fund is the norm – that is what is broken.

  11. David Raffa / Oct 1 2009 11:47 pm

    One of the mistakes in the bubble (yes, that one, in distant memory), is that VCs told everyone they only wanted to invest in billion dollar opportunities. Entrepreneurs, being entrepreneurial, told them exactly what they wanted to hear – why they thought their company would become a billion dollar company, regardless of what reality would dictate. To rationalize those big VC funds' existence, and reach for those billion dollar exits, too much money got invested in companies that were never going to be as big as the VCs wanted to believe. Huge amounts of capital got invested in some companies that could be very viable small businesses, but that is not what the investors wanted. Then it all blew up and everyone decided that the internet was not real and a whole bunch of investors walked away in disgust. What got lost in the mushroom cloud was the fact that like any other sector, there are few billion dollar companies, more hundred million dollar companies and lots of tens of million dollar companies. Nothing wrong with that. The lesson to be learned was to identify the opportunity and scale accordingly. Nothing wrong with selling your company for $20M three to five years after launch, and similarly nothing wrong with investing in that company so long as you did not have to invest $20M to build a $20M company. If you had invested $2M to $4M in that company and exited in four years at $20M, great result. Post-meltdown VCs and their investors still struggled – they all want the next Google. During all the post-meltdown handwringing, recaps, cram downs and multipe pref deals, quietly open source tools proliferated, on-line work groups formed, social media simplified marketing and everything just got faster, easier and cheaper to build. So the problem that prof investors grappled with – deploying huge amounts of capital to achieve massive exits, just got worse. Now you could build a company faster and cheaper, and sell it quicker and most likely in the tens of millions (Flickr, Stumbleupon, Now Public) and not hundreds of millions or billions. What you are talking about is really this same trend, but even further down the road than what I am talking about. No question the investment model needs to adapt. Their is a clear role for VC – biotech and clean-tech are two great examples – capital intensive, hugely long development cycles. But there are lots and lots of companies – not just digital media (altho completely agree with you on this one) that can be built into viable companies, in a shorter period of time, for less money, and realize a positve exit. it is all good.

  12. @valto / Jan 26 2010 9:13 am

    Thank you Danny for the great post. Having been following this space for about two years, I only found this post today (via google alert). I think this is by far the best and most common sense outline of the "Venture Capital 2.0" and how that have come about (including your old post about the broken VC).

    To simplify even more: Web 2.0 needs VC 2.0. Like we all know Web 2.0 means many different things, read/write instead of just read, social networks, seriously cheaper ways of doing things, cleaner UI's etc.

    I think with VC 2.0, that is the same thing. Making things much simpler, more transparent, much more efficient and therefore accessible and affordable. With our own solution, we are about to mash-up things even further by getting global community involved with a very unique way.

    This will be our core innovation to this segment that we have been building for past 18 months, and what we are about to launch within a week or so. With our solutions we also hope to be able to support these new accelerators/incubators that are popping in different cities around the world, since not all of them have that 25k/start-up to hand out.

    These are very exiting times for everyone involved and a great decade for entrepreneurship overall. Together with all players involved perhaps we can realize some of those promises that Internet was to blame for 10 years ago.

    Good luck everyone in the VC 2.0 space!

  13. Yu-kai Chou / Jan 26 2010 9:23 am

    Interesting. What if VCs just need to take a Ron Conway approach, invest in smaller rounds, but have it all spread out. So instead of having 10 portfolio companies who need a lot of money, get 50 who need less money. Since startups are still a numbers game, but you just have to make sure you have "hits" in your portfolio, isn't it wise to diversify even more? Of course this means the VC needs to do more work to find these deals, but since they get a decent amount of money to manage these funds, it probably makes sense. The challenge is how the VC should create value for all these companies. There could be some universal synergistic system that helps all the startups' operations, but promoting the right startups out of 50 could be a challenge.

    Anyhow, things do need to change. Question is, how to fix the broken VC model in digital media?

  14. @valto / Jan 26 2010 9:33 am

    We have a "raw plan" for this part as well, that we are going to introduce later. At least it takes part of that VC's problem away. "if they use less time in finding quality start-ups" will also give more time to focus on helping them. Also maybe part of the work could be "outsourced", but first they would need to open up a bit and let it happen.

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