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Investment





The following is a description of a model for securing private, as opposed to public, investment. The material presented on this page does not constitute an offer to sell, or a solicitation of an offer to purchase.

Investment Philosophy

We are taking an unconventional approach to investor participation. Our approach is based on a number of considerations:

  • The recent history of corruption within the traditional venture capital profession
  • Our own unsatisfactory interactions with the venture capital community
  • A fundamental conflict with the venture capital profession regarding the means by which wealth may be acquired
  • The nature of our engineering model, which is based on openness, fairness, and free competition on a level playing field
  • The new possibilities presented the Internet, which now provides a genuinely open, egalitarian, competitive forum for almost anything
  • Recent events and changes in how investment relationships are being conducted, indicating that the hegemony of the traditional closed investment model is now being broken
For all these reasons we are electing not to pursue the conventional approach to investment, which permits control and exploitation by the traditional investment community. During early-stage private investment the conventional approach permits excessive control and exploitation by venture capital investors. Later, during the transition from private to public investment (i.e. at IPO stage), the conventional approach permits domination, control and exploitation by the triad consisting of venture capitalists, investment bankers, and large institutional investors. In the traditional model this triad of middlemen profits mightily at the expense of all other players, including the company being invested in, and the individual public investor.

Instead, we are taking an approach which cuts out these traditional middlemen completely. We are taking an approach which is open, egalitarian, and permits participation by any interested and qualified investor. In these pages of our website we present our thinking and philosophy regarding investment, and we describe the new model we are following.

Corruption within the venture capital profession

There is nothing wrong with the principles of venture capital. According to these principles, great things can happen when money is invested in the right ideas and the right people. Great things get built, society benefits, and wealth is created. This is a positive-sum game, in which everyone wins.

And certainly, there are plenty of examples of this principle in action. Federal Express, Cisco Systems and Sun Microsystems—all of these and many others are examples of how venture capital investment can create benefits and wealth for everyone.

Unfortunately, the recent history of venture capital does not conform to this rosy picture. During the dot-com frenzy between August 1995 and March 2000, the venture capital industry indulged in an orgy of investment in thousands of companies that had no real prospects of success at all. Such companies had no credible ideas, no credible people, and no credible assets. Hundreds of these companies were taken public, and almost all of them subsequently went bankrupt. Within three years of the peak of the dot-com frenzy nearly 5,000 Internet companies on the Nasdaq had been either acquired or gone out of business.

These companies built nothing of value, contributed nothing to society, and created no wealth. Taking into account the enormous financial and human resources that were wasted in these abortive ventures, participation in these companies was, overall, a negative-sum game.

Nevertheless, despite the fact that these companies represented a net financial loss, they made enormous fortunes for a privileged few. How is this possible? The answer is easy: the privileged few made it, not by the creation, but by the redistribution of wealth. In other words, they took it from someone else.

The VCs participated in a scheme in which empty companies were taken public, their stock prices hyped up to enormously inflated levels, and the overpriced stock unloaded on an unsuspecting public. The VCs participated in a classic spin-and-flip scheme. Whether any laws were technically broken is open to dispute. But there is no question that in principle, the venture capital community perpetrated a gigantic fraud on the public.

Much more information about this fraud, including a series of in-depth articles and the Frontline documentary program dot.con, is available on the PBS website at: http://www.pbs.org/wgbh/pages/frontline/shows/dotcon/

The effects of such a colossal breach of trust are not easily washed away. Though the Internet bubble is now behind us, its effects on the venture capital community live on. We believe that there continues to be a secret yearning in the hearts of venture capitalists for the good old dot-com days, when enormous profits could be made, essentially by theft. We believe it will take quite some time for the psychological effects of this obscene, profiteering frenzy to die away.

Until such time as the venture capital industry takes part in process of genuine, honest self-examination and public accountability, it will remain fundamentally corrupt.

Our own experiences

Our own experiences with the venture capital community are fully consistent with this viewpoint.

At one time or another we have had face-to-face meetings with a number of venture capital companies, including Cedar Grove Investments, Doll Capital Management, Eagle River, Ignition, Mohr Davidow Ventures, OVP Venture Partners, and SeaPoint Ventures.

We have been consistently disappointed with the quality of our interactions with these companies. We have shown up to meetings at which the VC participants clearly have not taken the trouble to carefully read our Business Plan or other supporting materials. The Business Plan is "too long," we have been told; a comment that reveals more about the reader than the plan. "Just make it simple for us," we have been asked. For a company considering a multi-million dollar investment in an industry-building venture, this bespeaks an astonishing intellectual laziness. One might as well complain that the plans for building the space shuttle are "too complicated." Or that a musical score contains "too many notes."

And we have been disappointed in the lack of intellectual integrity that has frequently attended our interactions with VCs. We present ourselves in forthright and honest terms to any potential investor. However, we have often not received the same consideration in return.

Our conclusion is that the VC community continues to be intellectually and ethically compromised by an insidious spin-and-flip mentality.

But what we are doing does not conform to the spin-and-flip model. We are not twenty-something dot-commers with a PowerPoint presentation and not much else. We are experienced engineers and businessmen, and what we are doing is big, complex, and real.

On our side, we show up to a meeting ready to face tough challenges about absolutely any aspect of our engineering or business plans, and we don't expect any coddling. Neither do we offer any. We show up expecting our opposite numbers to have done their homework; when we find that they haven't, we are ready to make our displeasure known. When we disagree with someone elses analysis, we challenge it. If we ask questions that we feel are not properly answered, we persist in asking them.

The experience of having an entrepreneur talk back is something that VCs seem to find extraordinarily difficult to deal with.

In any event, whether as a result of our failings or theirs, our meetings with VCs have repeatedly devolved into shouting matches, and have concluded with us being escorted off the premises.

We point with pride to the fact of having been thrown out of the offices of some of the most prestigious high-technology venture capital companies in the Pacific Northwest.

Creation of wealth vs. theft: conflict with the venture capital profession

Both we as entrepreneurs, and venture capitalists as investors, are in business for the same reason: to make money.

The basic conflict between us is how we go about making it.

A review of the websites of most venture capital companies reveals a list of "success stories"—investments made in companies that subsequently went public, or were acquired by another company. All of these made money for the VCs and are therefore considered "successes."

But close examination of these lists of success stories reveals something further. Almost invariably, they include companies that fall squarely into the class of ventures that made money not by the creation, but by the redistribution of wealth. Let us be quite clear what this means: it means they made money by theft.

Some of the VC websites also include some wry self-deprecation about the "ones that got away"—passed up deals that subsequently made millions for someone else. However, there is no self-deprecation at all about the spun-and-flipped companies that made money for the VCs while building nothing of value, contributing nothing to society, and creating no genuine wealth at all.

If you succeed in making money while creating nothing of value, then your gain is someone else's loss. This is true if you running any type of scam; it is true if you are running any type of con game; and it is true if you are a VC running a spin-and-flip operation. If no wealth is created, you are playing a zero sum game.

A successful spin and flip operation requires cooperation by the entrepreneurs. A venture may initially be conceived by the entrepreneur as a geniune wealth-building project. However, once a VC enters the scene this presumption must be dropped. Depending on the entrepreneur's sophistication it may be dropped knowingly or otherwise; and depending on his integrity it may be dropped willingly or otherwise. But dropped it must be.

When a VC is re-tooling a venture as a spin and flip play, any effort exerted by the entrepreneur to create something of value only gets in the way. The effort required from the entrepreneur is to assist in spinning the story, not to create something real. If the entrepreneurs are attempting to build something worthwhile, then they and the VCs are inherently in conflict.

The entrepreneurs are required to play the role of support staff to the VCs. Regrettably, there is no shortage of professional engineering entrepreneurs who are quite willing to play this role. This may be out of venality, or it may be out of naiveté. More likely, it is out of venality masquerading as naiveté. When money is at stake, people are that much more willing to allow themselves to be manipulated. And when money is at stake, there is no limit to people's ability to deceive themselves.

We at Neda want to make money, but we want to do it the right way. We want to do it ethically: by creating something of value that people will pay for. And this places us in fundamental conflict with the VC profession.

To achieve our business goals, in the scope and scale defined in our Business Plan, we require the participation of investors. But we are seeking investors who clearly understand the difference between making money by selling something of value, and making money by theft.

Our engineering model

All our engineering constructs are based on freedom, openness, accessibility, and choice. We are strong proponents of open-source and free software. We are advocates of patent-free protocols. Our initial strategic project is Operation WhiteBerry, the creation of a truly open mobile messaging industry. Beyond that, our goals are the creation of a subscriber services industry based on Libre Services, a completely free and open subscriber services model.

This does not mean, of course, that we must also necessarily follow an open investment model.

However, the investment model that is most consistent with our corporate culture is one that has similar characteristics of openness and accessibility.

The effect of the Internet

From dating, to buying a used car, to finding an apartment, the Internet allows highly efficient market-making among large numbers of individuals. In general the role of the intermediary, or broker, is becoming increasingly irrelevant.

The relationship between entrepreneurs and investors, though with its own unique set of hazards, is not unlike many other types of relationship that have been revolutionized by the Internet. Like the relationship between any two groups of interacting parties, that between entrepreneurs and investors can also benefit from free access to the pool of potential partners, good information, and efficient communication.

We believe that the Internet can play a similar role in bringing together the right entrepreneur and the right investor.


Last modified: Tue Apr 29 00:07:24 PDT 2008
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