Adeo Ressi Says Problems With Venture Capital Are Grave

1 of 2 NEXT

Adeo Ressi didn't choose to serve as the representative of entrepreneurs. But the creator of the venture capital rating service, TheFunded, and the recently launched business incubator, the Founder Institute, is certainly enjoying the role. The way Ressi sees it, the days of entrepreneurs getting shafted and left behind are over.

Last week, Ressi and crew announced plans to open a branch of the Founder Institute in Seattle.

We chatted with the 37-year-old Ressi—who sold his previous gaming company to RealNetworks—to find out why he thinks the current venture capital model is broken and what he's trying to do to fix it. He also addressed some of the critics of TheFunded and why now might be the best time to start new tech companies. Excerpts from the interview below:

What will the venture capital landscape look like in five years? "Right now, I advise all founders in the program to avoid raising capital until they really have something substantive to show because I believe that the venture capital bubble has burst. You are seeing, really, a historical level of consolidation, and so I think within five years there is going to be dramatic substantive change of the venture capital model. And the way that change looks is really detrimental to entrepreneurship. The changes that are happening as you and I speak on this phone are extremely detrimental to both entrepreneurship and innovation. If I were to rate my concern level for the state of venture capital right now, it would be a 10. Ten meaning bad or serious or grave. So I am taking serious personal initiative to correct the dire state of affairs."

What's wrong with the venture capital business? "The LPs, the limited partners, are pulling out of venture investing at a staggering rate. The faith is shaken for good reason because the underlying model has been abused and is flawed. People are rolling $600 million funds every couple of years with a 2 percent management fee—so they are making tens of millions of dollars a year to run these funds with absolutely no correlation to whether those funds make returns. That just seems irrational."

What are you doing to fix that? "What I am doing, and I guess you are the first person I have told this about, officially, is…for the first time that I know of in history, I am bringing together a prominent group of limited partners, general partners, essentially venture capitalists, and entrepreneurs to have a discussion about the future. And that event will be in February, and it is called The Future of Funding."

How do you view your role in the transformation that is occurring in the venture business? "Essentially as a mediator and a catalyst, but I am also the representative of the entrepreneurial perspective, which I feel at the end of the day has been completely lost in all of the discussions. Essentially, because the venture capitalists are far more organized than entrepreneurs and the LPs are far more organized than the entrepreneurs, the entrepreneurs have never had a representative at the table."

And now they do through TheFunded and through you? "I have essentially decided that if no one else is going to be the representative, I will be the representative. And I don't mean that in a conceited way. It is just that I completely understand why a startup founder who is working 80 hours a week is not representing the interests of entrepreneurs. Let me be the first to say if someone else wants the job, they can apply."

What do you say to VCs who don't like the concept of TheFunded or complain about the negative ratings? "Every LP makes their present-day investment decisions by factoring in data from TheFunded, so (the VCs) should be cringing if they are not treating their entrepreneurs correctly, then they are not going to raise a new fund. Period. It is that simple. So they should be worried if the 13,000 CEO members of TheFunded don't have a collectively favorable view of them. They are in trouble."

On VCs becoming more transparent: "But there's an easy way to fix this. If the venture funds actually published their return data. But because venture funds keep their return data largely secret and refuse to agree to common reporting standards…the only source of data that LPs have is TheFunded. So they essentially make TheFunded powerful through their own secrecy and oblique performance. And, may I add, I am the only person I know that is trying to look across limited partners, general partners, and entrepreneurs and who works most of every day trying to fix this dynamic, which is broken. They should be thankful that A) TheFunded exists because it is the only source of information that LPs have to make investments decisions outside of self-reported data from the funds themselves, which I am not saying is bad, but there is no third-party, objective standard of reporting. And B), if they do well on TheFunded, it almost guarantees their success. So, it is the only vehicle I know of, that if a fund is at the top of that list, it is pretty certain that they will raise capital and they will get the best deal flow. Period."

1 of 2 NEXT