On evil VCs and Startup Ecosystems

Man who say it cannot be done, should not interrupt man doing it.
– Famous Chinese Proverb

I‘ve always thought that catchy headlining was a tool reserved for segments of Western media, until I came across a guest post by Teo Sze Siong on e27 titled VCs are evil, says this Malaysian startup.  Not only was the title sensationalized – its content was somewhat biased and potentially misleading to aspiring entrepreneurs.  Still, I respect Sze Siong’s opinion on the matter, and hope that the points I make below will encourage him to rethink his opinion of venture capital vis à vis startups.

I must say that I’m disappointed in e27’s decision to solicit and/or post the article on their blog.  I would like to view e27 as a representation of the budding startup ecosystem, at least in Singapore, if not Asia Pacific and beyond. I understand the possible motivations for such an article (i.e. viewership, incite a response, such as this post), but disagree on the implementation, and believe that there exists far better alternatives that can have wider impact, and move our ecosystem towards net positive.

For starters, I think it’s important to revisit history, in order to have the right perspective to hold a meaningful conversation about “evil VCs”.  Fred Wilson gave a good overview in an old post of his, titled Startup Ecosystems Take Time.

I think it is good to think about decades when you think about the development of new startup hotbeds.

In the first decade, you are largely making it up, copying what works elsewhere, the VCs and entrepreneurs are largely doing it for the first time, and while you can have successes, they are mixed with a lot of failures. That was 1995 to 2005 in New York City and 1965 to 1975 in Silicon Valley.

In the second decade, you start to get it right. The entrepreneurs are doing it for the second or third time. The infrastructure has developed (lawyers, VCs, recruiters). And it is easier to get talented employees to do a startup. This is where we are in New York City now and is where Silicon Valley was from 1975 to 1985.

In the third decade, the ecosystem is fully formed and producing great companies. That is where Silicon Valley has been from the mid 80s on.

Southeast Asia experienced its first decade during the mid-90s, through the dotcom boom years and ending in mid 2000 (telecom bust years).  That era is referred to as the “Forgotten Generation”, a phrase I learnt from veterans of that era whom I had coffee with.  Unlike the Valley, tech successes in this part of the world were limited to a clutch of system integrators, telecom operators and services companies.  Several startups here that were preparing for or had been lined up for IPOs in the US ultimately missed the boat.  Any gain in wealth was limited to few individuals, and little of that wealth was ever reinvested back into Southeast Asia’s startup ecosystem.  Most of our entrepreneurial and engineering talent either flocked across the Pacific to partake in Silicon Valley’s runaway successes in its third decade, or left tech for greener and easier pastures.  Few entrepreneurs plodded on in Southeast Asia’s startup ecosystem, which in turn resulted in meagre pickings for VCs in this part of the world.  If Silicon Valley was the lush Amazon Basin, then Asia Pacific would be the dry arid deserts of Atacama.

It took us a long time, but I think we’re now embarking on our second decade.  While we may not have a native pool of entrepreneurs doing it again for the second or third time, we are attracting a steady stream of foreign entrepreneurs, on the back of Asia’s rising dominance and success of our government’s efforts in reinventing Singapore as an attractive city to live, work and play in.  A majority of Neoteny Labs’ investments since May 2010 have teams that are entirely based in Singapore.  Parts of the infrastructure are starting to take shape, with the biggest problem right now being the shortage of engineers/hackers to fuel the startups.  Cool hacker-friendly events like RedDotRubyConf 2011 and PyCon Asia Pacific 2011 are also slated for the later parts of this year.

I won’t go point by point and counter the points raised by Sze Siong.  I’ve written about the difference between venture and lifestyle consumer internet businesses before, and won’t repeat it here.  I will say however, that:

  • “Long term sustainable businesses” is an ideal to aspire towards, as companies innovate in increasingly shorter economic and tech cycles. It should not be used as a counterfoil against an unwillingness or inability to innovate with venture capital.
  • There is “dumb free” and “smart free” in consumer internet.  It’s one thing to quote labels like “virality” and “freemium business models”, and another to actually have smart and comprehensive metrics on the backend, studying and understanding user behavior.
  • Using AOL and Yahoo killing the startups they acquire as examples to conclude that VCs are evil, is like pointing at dead bodies in hospitals and declaring healthcare pointless. You’re forgetting that management ability and even luck has a big hand to play in these things. Why didn’t you think of Paypal (eBay) or DoubleClick (Google)?
  • It isn’t that the “evil VC” modus operandi described by Sze Siong doesn’t exist. They do, but they represent such a small minority of VCs that you’re statistically less likely to meet them, and even if you do, common sense will tell you to give them a wide berth anyway.

Want to get VC funding for your company? Make sure you understand how the venture capital industry works and are gunning for top-tiered capital.  Growing slowly is indeed okay, but if you’re happy growing slowly, why would you ever need to point the finger at VCs and declare them as the boogeyman in the first place?

Flickr image courtesy of Tim N@ylor

About James Chan

James Chan is an entrepreneur, investor, geek, photographer and husband/father based out of Singapore. Apart from frequent travels to Vietnam, Myanmar and Indonesia for work, James can also be found online via his trusty 15" Retina MacBook Pro or iPhone 6+.