We bring you a tag-team post, with guest blogger Kevin Laws leading off and ancillary invective by yours truly. Over to Kevin:

VCs are Evil. Need evidence? Here's an interesting screed from last Sunday's San Jose Mercury News:

The Almighty Bottom Line

Basically, it says Nishan's founder is suing Lightspeed and Comventures for cheating him out of his fair share. While I'm quite sure that has happened in the venture world, this probably isn't the right example.

I did a quick check on VentureSource, a database that tracks venture capital deals. If the article is right and $5.5 million in bridges went in to the company, then the total venture money into the company is $85.5 million. According to VentureSource the company sold for $83 million (the article says $90 million).

Whether $83 or $90 million, employees got an average of $50K and the founder got almost a million dollars. This happened on an investment in which the investors either lost money or barely broke even. As described, this is not a very persuasive case of venture investors cheating some poor founder out of his rightful money.

In a subsequent email conversation with Matt Marshall (the author), he implies that the real story behind the lawsuit involves the option the company had of alternative bridge financing with less onerous terms. This may be true, but then the article should have turned on that issue. (I'll withhold judgment until I see more details).

Having been on the other side of the table, I strongly believe that entrepreneurs should be dealt with fairly. However, to my mind, that means ensuring that the entrepreneur understands the terms of the deals he or she signs. The terms themselves (such as the liquidation preference reviled in the article) are often necessary to ensure deals get done at all. [/Kevin]

Mr. Marshall might avail himself of an economics textbook and look up the concept 'risk premium.' The problem with these 20-20 hindsight stories is that they are written after the merger / financing / deus ex machina has succeeded. The financier putting up the bridge financing doesn't know that it will actually work out. Mergers and other transactions can and do blow up for many reasons, and in many cases the salvage value of the company thereafter is quite small. I've been there myself. The financier has to charge for this risk. The survivors bear a portion of the cost for the transactions that fail.

Even if I take at face value Marshall's statement that the story was really about the alternative financing that was passed up (didn't read that way to me, either), you'd think the Merc would do a little backgrounding - say a single database search like Kevin did - before uncritically printing the story of one side in a pending lawsuit. One might almost think they were more interested in capitalism bashing and hawking papers than in informing the public. But that would be cynicism, of course.
2:03:42 PM    

The New York Times. Big media hypocrisy in action.
10:44:07 AM