3 Grievances on the VC Industry

The VC conference that I attended earlier this week gave me a very different view of venture capital. I was expecting to hear a lot more from the fund managers regarding their investing strategies. There were a few things that really got to me, and made me wonder whether some of the people in the room actually knew what they were talking about. Here is a list of grievance that I have regarding the VC industry:

1. No Real Investment Strategy. Quite a few VCs in the room were asked the question "What kind of companies do you normally fund?" The answer that a lot of them gave was that they were looking for 'anything and everything', as long as they were 'disruptive technologies.' Now, there are A LOT of VC-backed companies out there that do not even mildly look disruptive. Flash video technology was disruptive- it affected the movie and music industries and created a revolution in personal expression in the internet sphere. The IPhone is being disruptive- Apple single-handedly changed the idea of what a phone should be and is on the way to beating RIM and other competitors into the ground. A social network twist that allows you to share musical ideas is NOT going to disrupt anything! Yet VCs keep putting money into these start-ups, which in turn fuels more non-disruptive start-ups to emerge (no wonder there is too much money chasing too few good deals!) This shows that either a) they don't have an investment strategy or b) they are not following their investment strategy. This conclusion got me thinking and I arrived at my second grievance.
2. They are essentially gambling. If you set out at the start to get a success rate of 10-20% something is seriously wrong. If your investment strategy is to make picks and get that low a rate I equate it to gambling (even a random toss of the die gives you a 16% chance of success.) Now, I understand that the model has been proven to work, people have made money, etc. etc. Yet I can't help but wonder how anyone could possibly think that this current model is the right one to use going forward. Just because this has been the typical result historically doesn't justify it being a future goal. This thought led me to yet another realization and, indeed, another grievance.
3. Misalignment of interests. The objective of the fund is to make money in x years (typically 6). This time constraint and the large funds that are raised forces VCs to make investments no matter what to make sure they get a large return for their investors (even if they haven't come across the next disruptive wonder) I believe that this is a misalignment of interests, as VCs are pushed to use their money unwisely, resulting in the ridiculous 1/10 success rate. Again, this system just doesn't seem right.
   

Now let's get back to the infamous complaint of there being 'too much money chasing too few good deals'. The first reaction that I had to this statement was that not enough innovation must be happening- after all, given the billions of dollars out thee one would expect innovation to increase. Yet in retrospect I wonder whether this excess money is playing some role in stifling innovation by encouraging people to create moderate innovations in an effort to make a quick buck. If this is true, it suggests that VCs are actually doing damage to themselves because of the aforementioned grievances. Then what are some possible solutions to these problems?

1. Give VCs less money. If they have less cash they will have to make every dollar count. No more of this 1/10 success rate business. Investment strategies will have to be clearly defined and followed to the letter. With this much scrutiny, entrepreneurs will be pushed to create true breakthroughs
2. Make VCs set higher targets... if VCs attain higher success rates because they are no longer swimming in cash then losses should go down and expected returns should go up. This means that LPs should demand higher returns on their capital and push the VC partners to invest their money better.
   

No VC at the conference really addressed these questions completely (admittedly, I only confronted 2 people on the topic) so I'd be interested in hearing peoples' thoughts on this.