Those who fund young, growing companies love to tout their industry's role in job creation. Jobs — we could use some of those now, right? But with venture-capital firms like Sequoia Capital insisting on across-the-board layoffs, it's hard to buy that argument; jobs may be created at startups quickly, but they are just as rapidly destroyed. But startups aren't the only ones being pinched by venture capitalists — they're also taking their investors for a ride, according to an industry insider.That insider is Adeo Ressi, the lanky, geeky founder of TheFunded.com, a site which lets entrepreneurs rate venture capitalists on everything from smarts to etiquette. (One effect of the site: Entrepreneurs say they no longer see as many VCs rudely pecking away at their BlackBerrys during pitch meetings.) Ressi recently gave a presentation to faculty members at the Harvard Business School. His message: venture capital has crossed a line. That line is the amount of money venture-backed companies have generated when sold, either to public-market investors in an IPO, or to larger companies in an acquisition. Historically, that has exceeded the amount invested in venture capital by pension funds, college endowments, and other institutions. Put dollars in, get more dollars out: that's the magical money machine that drove a multibillion-dollar boom in venture capital since the mid-'90s. In the first half of this year, that ground to a halt: Venture capitalists raised approximately $22 billion from investors, but their companies only generated $19 billion when sold. The reasons are many, but they amount to this: Venture capitalists are clubby, insular, and unimaginative, passing up 9 out of 10 deserving companies. And as a result, hundreds of their funds return no money to investors. If anything, the situation is far worse than Ressi posits; some of the profits from startup sales go to their founders, after all. And a large chunk goes to the VCs themselves, who typically take 3 percent of the money they invest each year as a management fee, and 20 percent of the profits they distribute to investors. One venture capitalist I know estimates that the actual venture-capital deficit — the difference between money invested in funds and money returned — has been running at $6 billion a year for years. Not all of that goes into VCs' pockets; some of it is simply wasted on businesses which will never turn a profit. But still: $6 billion a year, up in smoke. What is this — the automotive industry? Where's the bailout for venture-capital investors? The truth is they haven't been that outraged, if only because venture capital is such a piddling business for them, compared to their other investments. Those larger investments are in peril, however, and are jeopardizing VCs' fortunes. Some pension funds are running short on cash, their money locked up in securities they cannot easily sell — and their managers are turning down venture capitalists' requests for more cash. That, in turn, is spilling over to startups, which are being told they cannot raise more money. The consequence: There will be a slow-motion bloodbath. Slow, because the partnerships which tie venture-capital firms and their investors together are notoriously tricky to unwind; slow, too, because the extent to which VCs' startup portfolios are worth less — or just plain worthless — will take years to unfold. The problem has been an excess of optimism. To a bullish venture capitalist, every investment looks like it might be the next Google; to a pension fund manager, every VC firm might be the next Kleiner Perkins or Sequoia Capital. That optimism has been turned from liquid cash into illiquid hope, to the tune of billions of dollars. Bleeding out that hope — finding the deep, despairing bottom — is a process which might take a decade. Ressi thinks that the number of venture-capital firms should drop from 4,800 to 1,000 — while funding a larger number of startups. This will require painful changes in how they do business. But the venture-capital industry has hid its sickness for a long time, making a recovery all the more prolonged. Ressi will no doubt watch gleefully: He feels VCs mistreated him at his last company, Game Trust. "I will not rest until there is balance in the force," he told The Deal last year. Revenge is a dish best served cold, via PowerPoint. Ressi's presentation:
I confess: I completely missed the Tesla Roadster parked outside when I walked into Joey & Eddie's, the San Francisco watering hole where Valleywag used to hold weekly meetups with readers. But there was no mistaking the guy parked at the bar: It was Elon Musk, the CEO of Tesla Motors. He had driven up to surprise me at the behest of Adeo Ressi, the founder of VC-ratings site TheFunded.com, who was Musk's housemate in college. Matt Marshall, the editor of VentureBeat, also dropped by. Musk pressed a set of keys on me and offered a Tesla test drive; I turned them down. Honestly, I figured I'd crash the thing, and I didn't want to put a further dent in Tesla's already parlous cash balance. But I finally agreed to go for a ride with Marshall. How was it, you ask?Kind of boring. If you like amusement-park rides, you'll love the Tesla Roadster. If, like me, you sit there calculating the infinetesimal odds that the operator's insurers will allow a rollercoaster to actually pose any real danger to you, you'll hate it. I spent the ride up to Coit Tower and back thinking about how much coal was burned to generate the electricity now being thrummed away by the Roadster's motors. Back at the bar, Musk was affable enough, considering I've hinted he's taking out his midlife crisis on his employees and may be scheming to take over Tesla Motors completely by running it into bankruptcy. He laughed at the last idea, and then thanked me for the suggestion, saying he hadn't thought of that particular financial maneuver. Musk still blames cofounder Martin Eberhard for Tesla's current straits. When Tesla raised its fourth round of funding in 2007, Musk says, Eberhard, then CEO, told investors that the Roadster's cost was $65,000, giving it a $25,000 gross margin. "It's right there on the slide, with Martin's name on it!" Musk told me. The company, he adds, was already in the middle of a search for a CEO to replace Eberhard. A private-equity firm which had invested in Tesla sent some consultants to help Tesla sort out supply-chain issues, and they found that the Roadster's parts actually cost the company $140,000. "We might as well have sent customers $50,000 and saved the bother of making the car," said Musk. Former Flextronics CEO Michael Marks, a Tesla investor, confirmed their findings — and that's when Musk decided to fire Eberhard and replace him temporarily with Marks. Just as now, the company's cash position was running low, and Tesla tapped existing investors for new funding, despite having just raised a round. He revealed none of this at the time, he says, because it would have jeopardized the company's ongoing CEO search. (Not that that worked out particularly well; Musk installed Ze'ev Drori, then replaced him last month.) That's Musk's version, anyway. I'm skeptical, if only from experience with Musk; when he was running PayPal, I remember him making statements that company insiders told me didn't match the facts. But as he was leaving to drive back to the Valley, Musk mentioned that his divorce from his sci-fi novelist wife Justine was a mutual matter; he got the paperwork in first, but she was getting ready to file papers, too. That, at least, checks out. I'm still not sure if I should trust Musk's account of what led Tesla to these perilous straits. But I do believe now that he's brave enough to drive a Roadster up to San Francisco and deliver it in person.
Adeo Ressi, founder of TheFunded, an acerbic site where entrepreneurs review venture capitalists, dropped by the office of McDonough Holland & Allen the other day. That law firm represents EDF Ventures, which is the VC firm that's to be avoided unless you're "desperate," according to TheFunded's users. EDF is suing in order to reveal the identity of a critic who posted a poor review of the Michigan-based fund for misrepresentation. A common practice among VCs embarrassed by bad reviews.Ressi had the cheek to make a little video where he personally delivers the documents EDF requested. He assures the audience that they contain no information that will identify "John Doe," the unnamed defendant in the suit. The smiling Ressi makes a thumbs-up gesture at the end, clearly mocking the litigants. It also suggests that such charming and friendly customer service can be yours if you pay to promote your fund on the site.
Michigan-based venture capital firm EDF Ventures issued TheFunded.com a subpoena, asking the VC-ratings site to ID a commenter who wrote that EDF is "to be avoided unless you are desperate.” VentureBeat has a copy of the subpoena. TheFunded CEO Adeo Ressi told entrpreneurs their bitchiest secrets are safe with him. Said Ressi: "TheFunded does not store IP addresses, email addresses, or any other personal information associated with a Member account in any database or any file system operated by the company." Funny, before this, we'd never even heard of EDF Ventures. Now they've established what the PR people call messaging: EDF is an obscure VC firm known mostly for being touchy and litigious. To be avoided unless you are desperate.
Vancouver-based NowPublic is ostensibly all about citizen journalism. But since Guy Kawasaki sold Truemors to it and signed up as an advisor, it's becoming better known for publishing flattering lists of "influencers," supposedly ranking them according to various social media metrics. The first "Most Public" list focused on New York, but a new list for the Valley and San Francisco is "coming soon." And by virtue of being included in the latest edition, we received an early copy as a press release. Who comes out on top? Ubiquitous attention slut Robert Scoble, naturally. Full list after the jump.
Turned down by Sand Hill Road investors, only to see them woo your cofounder? Careful there, wantrepreneur. Complaining on rate-the-VC site TheFunded.com might get you sued. VentureBeat reports that in recent week, negative posts about VC firms Dolphin Equity, GreenHills, Matrix, Greycroft and Steamboat Ventures have all come down, quickly replaced by more positive reminiscences of deals well done. TheFunded founder Adeo Ressi blames lawsuits:
TheFunded.com, Adeo Ressi's VC database-meets-scandal sheet, is taking steps to avoid being "gamed." Venture capital firms are coaxing entrepreneurs to submit favorable reviews and improve their rankings, much like reporters who browbeat their colleagues to vote for their stories on Digg. [VentureBeat]
That mobile-phone barrier you've built between yourself and telemarketers is about to crumble. The nice chaps over at Intelius, who provide services like name, address, and Social Security number searches, are compiling an online mobile-phone directory they'll sell to anyone willing to pay them a measly $14.95 a number. They're operating on the philosophy that if you're willing to give your mobile number to the IRS or Domino's, you've opted in to an early-Saturday-morning game of phone tag with telemarketers. The dastardly sorts have ensured that the only way to get off the list is by faxing in a written request alongside an ID card. A fax machine: So low tech, it may just stop the Web 2.0 crowd in their tracks.
TheFunded.com, Adeo Ressi's members-only VC ratings site, now lets users submit details on the terms offered by VCs investing in startups. By publicizing terms, Ressi hopes to get investors to standardize the way they invest, making the process less confusing for entrepreneurs, he told VentureBeat. [TheFunded.com]
VC blogger Fred Wilson isn't pleased with his firm's position on VC ratings site TheFunded.com. Specifically, Wilson doesn't think Union Square Ventures should be ranked so high. "I am flattered by it to some degree," Wilson writes on his blog. "But it bothers me." Here's 100-word version of how Wilson would fix TheFunded.
This week on Valleywag was a first-class tour of Narcissistan. It began when Tinkerbell called in sick and sent us a half million pageviews. Then TechCrunch editor Michael Arrington went Tori Amos nuclear, claiming "I'm watching as the blogging world crucifies me." Finally, TheFunded.com founder Adeo Ressi complained his splash outing in Wired wasn't enough — he wanted the magazine's cover (and we gave it to him.) It all calls for a bulldog chaser. After the jump, a pic so cute it's NSFW. Can you handle it?
If you're like most people, you have no idea what TheFunded.com is. Nor do you care about the secret identity of Ted, the site's founding member. Why should you? Because an anonymous website has turned the tables on the all-powerful, often misbehaved venture capitalists who fund the cool tech innovations you love. The December Wired spells it out, but the tale stretches 45 times the length of this paragraph. I've extracted a PDA version for you.
The latest issue of Wired devotes pages and pages to Adeo Ressi, the anonymous "Ted" who runs TheFunded.com. Wired worked with Ressi to coordinate his unveiling with the story's publication at Wired.com on Thursday evening. Ressi's thrilled, right? Wrong. He complained at yesterday's event that Wired still didn't give him enough play. His take: He's a hot tech celebrity. His site is a big story. He expected to be this month's cover. Mr. Ressi, your wish is our Photoshop command. Click the thumbnail for full size. Apologies to Wired creative director Scott Dadich, who we're sure would never, ever use ITC Stone Sans Bold on the cover.
Adeo Ressi wants you to know that he's not just the pseudonymous "Ted," founding member of TheFunded.com, the venture-capitalist rating site. The 6'5" Ressi, who resembles a David Cross/Mr. Clean hybrid, sincerely believes that being "Ted" is a feat which which should be celebrated by having his likeness emblazoned on the nearest mountain. But how's his site doing as a business?
Why is Adeo Ressi smilling? The serial entrepreneur, now CEO of Game Trust, has pulled one over Sand Hill Road. Through a forwarded Skype phone line, Gmail account, and proxy-registered domain name, he's hidden his secret identity as "Ted," the creator of VC-ratings discussion board TheFunded.com. Now, at a time of his own choosing, staged in sync with a Wired profile, Ressi has outed himself. Which tells us one thing: He's much, much smarter than Fake Steve Jobs blogtard Dan Lyons.