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The VCC Die-Off
by: William Cate
The VCC Die-Off
By
William Cate

It's March, 2000. The DotCom Bubble has burst. Investors have lost billions of dollars. This isn't the first major investment mania to implode. There was the Market Crash of 1929 and the Silver Collapse of 1893. In fact, hundreds of speculative investment failures can easily be traced back to Tulipmania in 1636.

All speculators believe that someone will take them out of their investment at a profit. Speculators focus upon how much money they will make in a deal and not on how likely they are to lose their risk capital. The speculators' perceptions can easily be manipulated. Manipulation potential is a fatal flaw. Markets fail because greater fools can't always be found.

The reason that greater fools can't be found is that the reality of the risks of the speculation eventually overcomes the speculators' false perceptions. Is an Internet Startup Company, without revenues, worth a billion dollars? Is this company likely to have a balance sheet value that justifies the billion-dollar market capitalization, given that the odds are about one-in-one hundred that they will succeed? However, these questions aren't asked while the speculators are in a feeding frenzy. It happens only after the time when a shortage of greater fools causes the mania to end.

There were certainly winners in the Internet Speculation Mania, like Apple and Microsoft. But, for every winner there were over one hundred losers. Venture Capitalists and Angel investors have taken this one hundred to one odds against gamble for decades. They almost always lose over time. Usually, new speculative investors entering the Market offset the failure rate of past speculators, who depart the Market poorer. The DotCom burst bubble reduced the gamblers entering the market while increasing the percentage of short-term Venture Capitalist and Angel investor losers. The short-term failure rate lead to a major die-off of traditional Venture Capital Clubs (VCCs).

Traditional Venture Capital Clubs were a major source of risk capital. Membership was usually about equally divided between Accredited Investors, called Angels and principals of Venture Capital Firms. The Prime Directive for the Venture Capitalists at Club meetings was to recruit Angel investors as clients. Venture Capitalists are always seeking accredited investor clients. It's their source of money for their business gambles.

After World War II, VCC organizational structure was simple. The members paid a fee to attend the monthly meetings. The entrepreneurs paid a fee to offer their investment to the membership at these monthly meetings. The members who invested in a project almost always lost their money. After losing money in two to four gambles, the member dropped out of the Club. Over time, new members became harder to find as the losers were pointing out the reality that the speculations didn't prove profitable. Most of the losers never understood why they lost their money. It wasn't evil entrepreneurs or crooked club organizers. It was probability theory. The odds are always against Venture Capitalists and Angel investors.

By the mid-1980s, many Venture Capital Club's investment strategy had evolved to relying on a basket-investment approach to limit risk. The VCC membership would act as an informal cooperative of angel investors each of whom would put some money into the approved speculations. The theory being by spreading the speculative risk, the angels would reduce their losses and increase their odds of success. In fact, this strategy keep Angels involved with the VCC longer. However, the risk reward ratio eventually ensured that the Angels would be losers. By the 1990s, High Tech was glamorous and the logical focus for these speculative investments. The DotCom Bubble bursting meant that not only did the publicly trading DotComs fail, but also almost all of the VCC DotComs went under.

In March 2000, I had a mailing list of over three hundred traditional VCCs in the United States. Today, my mailing list is less than one hundred. To date, there hasn't been a resurgence of traditional VCC interest in the States. Given that Venture Capitalist now fund one business plan in every ten thousand they review and two-thirds of the VCCs are no more, entrepreneurs seeking venture capital will find it far harder to find the risk capital that they are seeking.

The alternative to traditional venture capital gambling is to follow the Venture Capital Profits strategy. At least one VCC, the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] is doing so. If you plan to wait until the Second Coming of the VCCs and better odds of a favorable review by Venture Capital firms, you will probably be waiting for decades.

To contact the author, email Beowulfinvestments@Earthlink.net

About the Author

He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]

 


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