A few VCs had some insightful comments. But we cannot expect VCs to welcome disruption to their own model, which has generated big profit from very little risk (at least for the General Partners who run VC firms, if not always for the Limited Partners who put money into them). Investing in firms that disrupt the market is one thing; welcoming disruption to one's own highly lucrative model is an entirely other thing. VCs don't want to criticize their peers, either, who they often do deals with.

Willing to Go on Record to Criticize VCs

It takes guts to criticize people with power. And in the innovation economy, VCs have a lot of power. In aggregate, they have the power of veto over your venture dreams (but the real entrepreneur, of course, never lets anyone veto their idea and finds a way around any problem or rejection). The Funded has done a lot to shine a light on VCs, highlighting the good ones and not so good ones. Think of The Funded like Yelp for VCs. But as with any rating system, it can be gamed, and anonymity is an issue. Many entrepreneurs are willing to go on record to praise their VCs; few are willing to criticize in public, for two reasons:

1. Raising VC cash in future might become harder.
2. They are predisposed to the view that critics are sore losers, whose ventures were simply not good enough to get VC funding.

Georges van Hoegaerden is clearly not afraid to be critical in public, as his blog shows. He is a successful entrepreneur, as his track record shows, so he cannot be dismissed with the "sore loser" label. He has built and sold a number of companies with both VC and angel money.

Listen to the Interview

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What Did We Ask Georges?

• Question #1: You have been openly critical of VCs. Not many people are willing to do that. Why are you willing, and what do you hope to achieve by it?
• Question #2: What are the three most obvious signs that you are dealing with a bad VC and should avoid it. Conversely, what are the signs of a good one (other than it writes large checks)?
• Question #3: How is the VC model changing (specifically for Web tech, rather than clean tech or bio tech), and how can entrepreneurs leverage these changes?

If you care about the role that technology innovation plays in creating prosperity for millions of people, the whole interview is worth a listen. If you are a busy entrepreneur, we'll distill a few points for scanning below.

The Venture Eco-System

Georges spoke a lot about the venture "eco-system." This includes:

• The entrepreneur. He believes that too many VCs pay lip service to the idea that the entrepreneur is the one who creates value. These VCs believe their role as intermediary between the Limited Partners and entrepreneur makes them the important player. You can usually tell them by their rude behavior.
• The Limited Partner (LP). As an entrepreneur, you don't hear much of LPs. They are the folks who put money into VC funds. They can be institutions (for example, a pension fund that invests your money) or rich individuals. If they do not get good returns from VCs as an asset class, they will put their money in other asset classes, and that would be very damaging to everybody in the technology innovation business.
• The General Partners who run VC funds. They are the intermediaries who get paid "2 and 20" (2% of funds under management, and 20% of the profits generated from investments). As intermediaries, they have to add value. The fundamental point Georges is making is that both entrepreneurs and LPs are questioning the value added by VC fund managers.

It is one thing for entrepreneurs to be critical. But when both entrepreneurs and LPs are critical, something is likely wrong in VC land. Georges speaks to many LPs, so this is not simply the rant of a frustrated entrepreneur.

Macro-Economic Advantage

Georges spoke a lot about macro-economic advantage. In simple language, this means finding a large market that is ripe for disruption and then finding some new technology that fundamentally changes the rules of the game. That is traditionally what VCs have invested in. This requires a lot of hard work and judgment on their part. They have to really understand both the market and the emerging technology to make a judgment call.

That is a very different world from, "Show me your site and show me the adoption metrics, and if it takes off like a rocket and you need some cash to sustain it, them I'm your man." That is easy; very little value added there. The VC is simply offering cash, not earning its place in the venture eco-system.

What we are also seeing is that very few of these ventures from the Web 2.0 era are creating lasting economic value. Where are the profitable VC-backed ventures that started around 2003? They are few and far between. At ReadWriteWeb, we have tried to track them down and have not found many.

You cannot go public without profit. Not after the dot-com bubble burst and not now.

Plenty of exits have made good money for VCs and entrepreneurs. But how many have made money for the acquirers? Not nearly enough. So that ruins the M&A exit market. Acquirers have their own investors who ask awkward questions such as, "When will this deal be accretive to earnings? Show me how you'll do this."

Georges is doing root-cause analysis. The root cause is not Sarbanes Oxley or the lack of investment bankers doing M&A deals. Those are simple problems to fix (have a good accounting system in the first case, and find some smart, motivated hustlers in the second). The root cause is what Georges calls "sub-prime VCs."

He talks about sub-prime VCs and how they attract sub-prime entrepreneurs who create sub-prime ventures. Basically, "sub-prime" is shorthand for, "Where is the real value, not the financial flim-flam?" Entrepreneurs who fundamentally build to flip (despite whatever public statements they make) go to VCs that don't know how to build profitable, self-sustaining ventures. Sub-prime is an ugly label. But in some cases, it fits. This is what we tried to articulate in our post on Momentum VCs.

Look at Apple as Entrepreneur + VC

Georges suggests looking at the value that Steve Jobs has created with iTunes and the iPhone. That could have been done by any entrepreneur with decent VC backing. Sure, the Apple brand helped, but in the big picture, brands are created from products. Jobs did nothing that another entrepreneur working in real partnership with a VC could not have done, too. Jobs was effectively both VC and entrepreneur. He allocated capital (the primary job of a CEO) and built the team to execute the vision.

Why have we not seen more ventures like this? Is it simply too hard? Are there no opportunities left?

Listen to the Interview

Download the MP3.