The role of VCs?

I spent a great week in the Bay Area talking with companies and VCs as I look for my next opportunity.

I had the pleasure of meeting some senior people at YouTube and it started me thinking about companies that grow rapidly, get wonderful customer adoption, but still don’t know how to make money, at least not enough money.

It is clearly now Google’s issue that YouTube doesn’t make enough money to justify a $1.6 billion price tag. What role should the VCs play in company formation and business model determination? Or should they just be happy (in this case thrilled) with financial returns?

Is the VC only responsible to his limited partners for generating returns, or should they be focused on building enduring companies? Or at least an enduring business model (even if the company gets acquired)? If VCs are only looking for returns, period, then they deserve most of the criticism heaped on them for pushing crappy companies to go public during the 1999-2001 Internet bubble. If so, they are much more like hedge funds (who make no bones about seeking absolute returns) than they want to believe.

One of the friends I met with works in a late-stage venture fund and he was talking about Twitter. I think Twitter is a great idea, but it’s clearly not a great company yet, even though they have tens of millions of users. This investor passed on a chance to invest in Twitter because it didn’t meet his firm’s guidelines (not enough revenue). In this case, zero revenue. While we’re both convinced Twitter will figure out a business model, will it be sustainable? Will it justify the lofty price that some major Internet company will pay for it? Or will it be another YouTube, left to the acquiring company to figure out how to make enough money? What role should the VCs play in that? Or is it enough that they, and the founders, made money?

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