The Founders Fund – Changing Times for Venture Capital

The Founders Fund is the latest private equity firm to hit Silicon Valley and make waves with the way old line Venture Capital firms have been doin business. The Founders Fund, a small firm (by today’s standards) started by Peter Thiel, a 39 years old money manager, who has cashed out his position from he sale of PayPal, the online payment service. The name of the fund, is based on his belief that founders and entrepreneurs should get a better deal and own more of the company they started.

Changing the Rules

Usually when a major player changes the rules of the game, and is successful, others follow that lead. With fewer deals for venture capital firms to chase, the tide may be shifting in favor of start-ups, quality start-ups anyway. The poor management team with a poor business plan will still be lucky to even get funded.

There seems to be much more venture capital chasing fewer quality deals these days and that type of competition is good. This causes a shift in the balance of power. The Founders Fund by restructuring deals more favorably toward management of a start-up will likely get better quality deals and hence be more successful.

This will cause venture capital firms to rethink there deal structures and they will be forced to offer better deal terms, at least for the larger and more quality start-ups. Those start-ups may find themselves in a very favorable position where they can have more leverage at the bargaining table.

This appears to be the same cycle that occurred when the dotcoms and telecoms blew up several years ago. The deal flow slowed to a snails pace and only the better deals got funded, but they were able to negotiate better deal terms.

Well-Connected

Although The Founders Fund is still a fairly small in terms of dollars under management, it is very well-known and well-connected in Silicon Valley circles. Also, part of The Founders Fund team are Thiel’s former PayPal colleagues, Ken Howery and Luke Nosek, both just 31 years old. Rounding out the group is 27 year old Sean Parker, who was the tremendous ability for grasping the tremendous potential some start-ups possess. His early experience with start-ups like Napster, Plaxo and Facebook are a testament to his ability.

Overdue Change

Most industries change over time and the Venture Capital industry is long overdue. Hopefully, The Founders Fund will be the catalyst for such a change. Their success in the coming years will obviously be closely watched by many and the shortage of good start-up concepts should cause venture capital firms to become more competitive with their deal structures.

For more information visit The Founders Fund website.