Home Is Venture Capital Broken?

Is Venture Capital Broken?

When angel investor Chris Sacca announced the launch of his new investment firm Lowercase Capital on Friday, he positioned the news with a lengthy essay – the firm’s “creed” – titled “Venture Capital is Broken.”

In it, Sacca observes that ten years ago, it cost over a million dollars for a tech business to launch, with steep hardware, software, office, and Internet costs, not to mention the “lavish parties so print media would write about their pipe dreams.”

Lowercase Capital’s Creed

But today, it is far easier and far less expensive for entrepreneurs to design, code, and launch web services. But, Sacca writes, “many traditional VC funds have been loath to admit this reality and downsize their five hundred million dollar hauls. Why? They are paid fees based upon their total amount of money managed, thus there is no incentive for them to be smaller. Yet, as they try to inject those piles of money into early stage companies, interests become misaligned and an inherent conflict between the investor and the founder often arises. Fund returns, the companies, the entrepreneurs, and the users all suffer as a result.”

Sacca contends that Lowercase Capital recognizes the shift in the tech and investment landscape and that the firm offers more than just investment and money management. “We dive in to work with teams that obsess over user experiences, customer happiness, and that, to quote Paul Graham, ‘make something people want.’ Along with relatively small amounts of money, we give them the time, attention, and the empathy that catalyze winning outcomes for all involved. Rolling up our sleeves, we help design front pages, invent new services, prioritize product features, negotiate partnerships, and deal with the everyday professional and personal challenges of startup life.”

Is the VC Model Broken?

Discussions about whether or not the VC model is broken have been ongoing for some time, although arguably what constitutes “broken” might different for investors and for entrepreneurs. Late last year, Steven Kaplan of University of Chicago professor and Josh Lerner of Harvard Business School published a study claiming “It Ain’t Broke.” But others in the investment and tech communities continue to argue otherwise. In a video interview with GigaOm last month, entrepreneur/investor Chris Dixon, for example, makes a strong case for a shakeup in the way in which traditional VC funding works.

What do you think? Is venture capital broken? And do firms like Sacca’s Lowercase Capital point the way for alternative systems of funding and support for entrepreneurs?

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