My Year as a VC

Little Engine Ventures is out of the startup game. My title when we started was Director of Startups. I was to oversee deal flow and lead the investment decisions in early (seed) stage technology companies that we believed had high potential to grow. From the beginning there was only going to be a small portion of the capital we manage devoted to this. No more than 15% was the goal. We’re very happy with the six investments we made but we recently decided the cost to deploy capital into this area isn’t worth it.

I believe the cost for us to work in this area is too high for a number of reasons. I won’t try to address all of them here, but I think the following are the most impactful.

Credit needs to be given to the coworking spaces, accelerators, pitch competitions, and everything else in the “startup ecosystem.” While it certainly isn’t perfect, I do believe there is more help available in many aspects to those wanting to start a new company now than ever before. So if that’s the case, why are we getting out? The effect of all this help in the ecosystem makes the investors role more difficult for two reasons. There are so many folks starting companies it is difficult to tell at the earliest stages who will stick with it. The good ones do stand out, but because we have these gathering holes, all of the investors flock to them. It’s no longer esoteric. It only takes a few to drive up valuations beyond a point where they don’t work for our fundamental beliefs about risk and investing.

We want to help build businesses that can grow and be sustainable for the long term. We want to build the most profitable businesses with the lowest risk, not necessarily the biggest businesses. Our investors are aligned with us and in turn we need to be aligned with the leadership of the company and other owners of the company. Taking minority positions in these companies with a viewpoint that differs from many in the venture capital industry will lead to the odds not being in our favor in many of these deals.

At our heart, we are value investors. I believe that many venture capital investors are investing based on momentum. They are counting on another group of future speculators willing to pay a higher multiple on the company. The last group in this line they count on is the general public. If that weren’t the case, why would an IPO be considered a finish line? An IPO isn’t supposed to be a finish line. It is another round of financing that should be done to grow the company not to provide liquidity to earlier investors.

In my year as a VC we made six investments. We are glad to have partnered with these companies. We hold significant shares and will continue to work closely with them. We have to think about how we allocate time as well as dollars. We will concentrate both of these resources into acquiring small businesses that we control. I plan to write about how we can apply the lessons learned from the startup community into this underserved space.