That insider is Adeo Ressi, the lanky, geeky founder of TheFunded.com, a site which lets entrepreneurs rate venture capitalists on everything from smarts to etiquette. (One effect of the site: Entrepreneurs say they no longer see as many VCs rudely pecking away at their BlackBerrys during pitch meetings.) Ressi recently gave a presentation to faculty members at the Harvard Business School. His message: venture capital has crossed a line.

That line is the amount of money venture-backed companies have generated when sold, either to public-market investors in an IPO, or to larger companies in an acquisition. Historically, that has exceeded the amount invested in venture capital by pension funds, college endowments, and other institutions. Put dollars in, get more dollars out: that's the magical money machine that drove a multibillion-dollar boom in venture capital since the mid-'90s. In the first half of this year, that ground to a halt: Venture capitalists raised approximately $22 billion from investors, but their companies only generated $19 billion when sold.

The reasons are many, but they amount to this: Venture capitalists are clubby, insular, and unimaginative, passing up 9 out of 10 deserving companies. And as a result, hundreds of their funds return no money to investors.

If anything, the situation is far worse than Ressi posits; some of the profits from startup sales go to their founders, after all. And a large chunk goes to the VCs themselves, who typically take 3 percent of the money they invest each year as a management fee, and 20 percent of the profits they distribute to investors. One venture capitalist I know estimates that the actual venture-capital deficit — the difference between money invested in funds and money returned — has been running at $6 billion a year for years.

Not all of that goes into VCs' pockets; some of it is simply wasted on businesses which will never turn a profit. But still: $6 billion a year, up in smoke. What is this — the automotive industry? Where's the bailout for venture-capital investors? The truth is they haven't been that outraged, if only because venture capital is such a piddling business for them, compared to their other investments.

Those larger investments are in peril, however, and are jeopardizing VCs' fortunes. Some pension funds are running short on cash, their money locked up in securities they cannot easily sell — and their managers are turning down venture capitalists' requests for more cash. That, in turn, is spilling over to startups, which are being told they cannot raise more money.

The consequence: There will be a slow-motion bloodbath. Slow, because the partnerships which tie venture-capital firms and their investors together are notoriously tricky to unwind; slow, too, because the extent to which VCs' startup portfolios are worth less — or just plain worthless — will take years to unfold.

The problem has been an excess of optimism. To a bullish venture capitalist, every investment looks like it might be the next Google; to a pension fund manager, every VC firm might be the next Kleiner Perkins or Sequoia Capital. That optimism has been turned from liquid cash into illiquid hope, to the tune of billions of dollars.

Bleeding out that hope — finding the deep, despairing bottom — is a process which might take a decade. Ressi thinks that the number of venture-capital firms should drop from 4,800 to 1,000 — while funding a larger number of startups. This will require painful changes in how they do business. But the venture-capital industry has hid its sickness for a long time, making a recovery all the more prolonged.

Ressi will no doubt watch gleefully: He feels VCs mistreated him at his last company, Game Trust. "I will not rest until there is balance in the force," he told The Deal last year. Revenge is a dish best served cold, via PowerPoint.

Ressi's presentation:

Kind of boring. If you like amusement-park rides, you'll love the Tesla Roadster. If, like me, you sit there calculating the infinetesimal odds that the operator's insurers will allow a rollercoaster to actually pose any real danger to you, you'll hate it. I spent the ride up to Coit Tower and back thinking about how much coal was burned to generate the electricity now being thrummed away by the Roadster's motors.

Back at the bar, Musk was affable enough, considering I've hinted he's taking out his midlife crisis on his employees and may be scheming to take over Tesla Motors completely by running it into bankruptcy. He laughed at the last idea, and then thanked me for the suggestion, saying he hadn't thought of that particular financial maneuver.

Musk still blames cofounder Martin Eberhard for Tesla's current straits. When Tesla raised its fourth round of funding in 2007, Musk says, Eberhard, then CEO, told investors that the Roadster's cost was $65,000, giving it a $25,000 gross margin. "It's right there on the slide, with Martin's name on it!" Musk told me. The company, he adds, was already in the middle of a search for a CEO to replace Eberhard.

A private-equity firm which had invested in Tesla sent some consultants to help Tesla sort out supply-chain issues, and they found that the Roadster's parts actually cost the company $140,000. "We might as well have sent customers $50,000 and saved the bother of making the car," said Musk. Former Flextronics CEO Michael Marks, a Tesla investor, confirmed their findings — and that's when Musk decided to fire Eberhard and replace him temporarily with Marks. Just as now, the company's cash position was running low, and Tesla tapped existing investors for new funding, despite having just raised a round. He revealed none of this at the time, he says, because it would have jeopardized the company's ongoing CEO search. (Not that that worked out particularly well; Musk installed Ze'ev Drori, then replaced him last month.)

That's Musk's version, anyway. I'm skeptical, if only from experience with Musk; when he was running PayPal, I remember him making statements that company insiders told me didn't match the facts. But as he was leaving to drive back to the Valley, Musk mentioned that his divorce from his sci-fi novelist wife Justine was a mutual matter; he got the paperwork in first, but she was getting ready to file papers, too. That, at least, checks out. I'm still not sure if I should trust Musk's account of what led Tesla to these perilous straits. But I do believe now that he's brave enough to drive a Roadster up to San Francisco and deliver it in person.

Ressi had the cheek to make a little video where he personally delivers the documents EDF requested. He assures the audience that they contain no information that will identify "John Doe," the unnamed defendant in the suit. The smiling Ressi makes a thumbs-up gesture at the end, clearly mocking the litigants. It also suggests that such charming and friendly customer service can be yours if you pay to promote your fund on the site.

]]> Tue, 26 Aug 2008 03:00:00 PDT Jackson West http://valleywag.com/index.php?op=postcommentfeed&postId=5041791&view=rss&microfeed=true Michigan-based venture capital firm EDF Ventures issued TheFunded.com a subpoena, asking the VC-ratings site to ID a commenter who wrote that EDF is "to be avoided unless you are desperate.” VentureBeat has a copy of the subpoena. TheFunded CEO Adeo Ressi told entrpreneurs their bitchiest secrets are safe with him. Said Ressi: "TheFunded does not store IP addresses, email addresses, or any other personal information associated with a Member account in any database or any file system operated by the company." Funny, before this, we'd never even heard of EDF Ventures. Now they've established what the PR people call messaging: EDF is an obscure VC firm known mostly for being touchy and litigious. To be avoided unless you are desperate.

1. Robert Scoble
2. Michael Arrington
3. Jack Dorsey
4. Biz Stone
5. Matt Cutts
6. Pete Cashmore
7. Dave Winer
8. Guy Kawasaki
9. Loïc Le Meur
10. Kevin Rose
11. Merlin Mann
12. Stowe Boyd
13. Jeff Atwood
14. Jeremiah Owyang
15. Veronica Belmont
16. Kara Swisher
17. Scott Beale
18. Marc Andreessen
19. Ryan Block
20. David Sifry
21. Emily Chang
22. Om Malik
23. Timothy Ferriss
24. Nick Douglas
25. John Battelle
26. David Cohn
27. Louis Gray
28. Tom Foremski
29. Tim O'Reilly
30. Ariel Waldman
31. Matt Mullenweg
32. Dean Takahashi
33. Philip Kaplan
34. JD Lasica
35. Sarah Lacy
36. Brian Solis
37. Charlene Li
38. Rafe Needleman
39. Dan Farber
40. Howard Rheingold
41. David McClure
42. Margaret Mason
43. Jason Goldman
44. Leah Culver
45. Chris Shipley
46. Jackson West
47. Liz Gannes
48. Owen Thomas
49. Adeo Ressi
50. Max Levchin

(Photo from Michael Arrington)

TheFunded.com is surprised to learn that venture firms are spending money entrusted to them by their own investors to silence the opinions and constructive criticism of legitimate founders and CEOs.

The saving grace of Intelius's new directory? It's mostly useless. My boss tried to use it to ID the guy responsible for TheFunded.com, before Adeo Ressi outed himself in the pages of Wired. (Photo by freezelight)

I didn't see Mike Moritz on the list. Or partners from Accel, Benchmark, Kleiner Perkins, Sequoia, Matrix, Greylock, Venrock. What I saw [was] a list of someday superstars. If TheFunded is going to be a resource we can rely on, Adeo needs to have two tiers of voters: people with real knowledge and others. Categorize the commenters so readers can judge the source, and not display poll results until the sample size is large enough.

Start

• Superpowers fighting to claim the melting, oil-rich Arctic will want the moon next; we need the rule of law.
• New unsticky "Clean Gum" won't mar sidewalks.
• Satellite photos caught an empty Burma during a communications blackout.
• Faceslam: Facebook snub. Crowd farming: Stadium foot traffic as power plant.
• Forty rocketeers made an X-Wing, but it exploded.
• Chipuya Town is a Japanese mobile MMORPG.
• Matter/antimatter mix powers superlaser.
• Athlete's foot medicine contains no surprises.
• Mr. Know-it-all: Surgical masks do little against Chinese pollution. eBay bidding just for good feedback violates TOS. Shark cartilage doesn't fight cancer.
• Russia's covering Chernobyl with a steel shelter.
• Fire hoses spray mist on ignitable gases.
• Lace running shoes more comfortably: One normal cross, then up to the next eyelet, then cross again.
• Memorize numbers by giving each digit a mnemonic, then think of those mnemonics appearing along a walk around your block.
• Google buys companies that dominate, are first to a space, or could be a threat if Microsoft buys them.
• Self-absorbed geeks = "microcelebrities."
• Preteens are the best competitive texters.
• If The Golden Compass makes bank we'll see two sequels.
• Scotsmen have reinvented ancient Scottish ale.
• Infoporn: Silly Santa math.

Play (highlights)

• Stripper-blogger Diablo Cody wrote the sweet new comedy Juno.
• Comic book Persepolis became a 9-out-of-10 film.
• F4CC motorcycle could go over 200 mph but the tires would melt.

The Angry Mogul

• CD sales fell 10 percent in 2006. The future is digital.
• Universal Music CEO Doug Morris made Yahoo and YouTube pay to run music videos. He made Microsoft pay UMG a dollar per Zune. He's pissed at piracy. But he's letting Amazon sell DRM-free MP3s.
• Why DRM-free? To break Apple's monopoly. iTunes represents 20 percent of all U.S. music sales.
• UMG's digital revenue comes from iTunes and cell companies (ringtones).
• UMG will sell a subscription service (with DRM) called Total Music, urging Microsoft to add it to Zunes.

The Ultrabuilder

• The secret behind future "supertall" buildings is the buttressed core, a Y-shaped floor plan with a strong central support.
• Structural engineer Bill Baker is the go-to man for supertalls.
• Baker designed the butressed core to maximize window access and usable space in skyscrapers like the over-2600-foot Burj Dubai; it makes buildings taller, faster to build, and potentially more profitable.

Ode to Joystick

• Video Games Live directs live orchestra and choir videogame music performances.
• Creator Tommy Tallarico and conductor Jack Wall arrange the score and direct local musicians at symphony halls.
• VGL and competitor Play! are barely profitable, but they bring a new 20s/30s crowd to symphony halls.

Getting a Grip

• Making robots interact with a human environment, even finding and picking up a stapler, is tough.
• Solution: Make them learn. AI, for real this time, honest!
• RoboCub is a humanoid bot being taught to mimic and learn from human motions it sees.

Features
What Went Wrong

• Iraq went wrong because we concentrated on the hardware, not the social landscape.
• Since the '90s, everyone (including Wired) got excited about war in the information age.
• Under Bush, Rumsfeld made an Office of Force Transformation to give the armed forces a $230-billion networked makeover.
• That hasn't helped against our tech-primitive enemies in Iraq.
• Oh, our technology worked great for invasion, but it's rubbish at securing peace. For that, we actually need troops.
• For example, 150 troops are in charge of security for the 50,000-person Iraqi city of Tarmiyah.
• Their leading officer recruits local watchmen to help.
• US forces have sophisticated command centers on a network (CPOF), but the system was designed for "short, decisive battles" against armies, not extended missions against insurgents.
• Many forces can't get online enough to make CPOF useful.
• Meanwhile, insurgents just use the Internet and TV, and they already know the local culture.
• Psyops agent Joe Colabuno wins over informants by knowing the culture, name-dropping sheikhs and debating using the Koran. He makes posters spoofing insurgents to sway public perception.
• General Patraeus still believes in network-centric warfare, but as the man behind the surge, he believes in adequate troops too.
• The co-conceiver of networked warfare says: Combat operations are like football; stability operations are like soccer. The network model needs to adapt.
• The Army is adapting, spending $41 million on "Human Terrain Teams" of "150 social scientists, software geeks, and experts on local culture." They're credited for more local support and less combat in certain areas.
• HTTs will become more integral, but we don't know if they'll be armed or given command authority.

Back to the Futurama

• Five years after Fox canceled it, David Cohen and Matt Groening's Futurama returns on Comedy Central.
• The new shows — four features split into 16 22-minute episodes — are also being released on four DVDs starting November 27.
• Fox shuffled the show during its four seasons, and ratings dropped.
• Added to those four years, reruns and DVD sales earned over $100 million, estimates a writer.
• Creators are David X. Cohen and Matt Groening.
• Groening, Simpsons creator, still draws a weekly comic strip called Life in Hell. He has never seen any Star Trek.
• Cohen is a Trekkie, invented "Worst. Episode. Ever," and loves sci-fi.
• Futurama is about pandering to the elite audience. Cohen checks the web to see fans discover hidden jokes; then he makes the jokes harder.

Your DNA Decoded

• A thousand-dollar test tells you what diseases your genes predispose you to, as well as other factors.
• In the future, we'll use genetic information to plan our lives, and we could live an extra ten years.
• 23andMe, founded by Anne Wojcicki, wife of Google cofounder Sergey Brin, will give people their genetic info and build a database for research. Google invested $3.9 million.
• FedEx 23andMe a ten-minute wad of spit, and view your results online in under a month.
• There's still much to learn about which combinations of genes cause what conditions.
• It cost the Human Genome Project $3 billion to map an entire genome in 2003; it's about $250,000 now.
• Disease isn't solved yet; half of heart disease cases aren't explained by known risk factors.

Chat: Rich Barton, Zillow

• The housing crunch makes Zillow's algorithmic house appraisal more useful.
• Selling houses is no longer binary: homeowners can name a "make me move" price.

The Bone Factory

• Many medical skeletons are illegally shipped overseas. India has long been the biggest exporter.
• The country banned exporting human remains in 1985, but the black market thrives.
• India banned exports after a bone trader with 1500 child skeletons was suspected of kidnapping and killing the children.
• Skeletons are vital for medical schools.
• Example process: Corpses are taken from funeral pyres or graves, anchored in a river where they're eaten to mush and bone, scrubbed, sunbleached, and sanitized.

The Secrets of Silicon Valley

• "Ted," founder of TheFunded.com (where startuppers rate venture capital firms), is Adeo Ressi.
• Ressi, a self-promoter, made millions with 90s dot-coms, then started an online gaming platform Game Trust, which was taken over by investors.
• Ressi started TheFunded in response, getting friends like Weblogs Inc. founder Jason Calacanis to tell stories.
• When firms started invading TheFunded, Ressi banned shills to keep ratings real.
• Angel investments are surpassing VC money; hedge funds offer a low-maintenance alternative. VCs have to emphasize "customer service."

Nick Douglas writes at Valleywag, Too Much Nick, and Look Shiny. He would, in fact, read that magazine if you paid him to.

(Photos by Jason Calacanis)

TheFunded.com, a community site for startups to anonymously review and rank venture capital firms, has given entrepreneurs a peek into the secretive VC industry and a chance to dish about some of the unseemly behavior they've witnessed there. "We have seen distinctive pieces of our business plan end up in marketing materials of a competitor," reads one testimony. Another: "He had his feet up on the table the whole time he was telling us how bad our business is."

The site has 3,150 members. Neither Ted nor TheFunded is beloved by the venture capital community, which is more accustomed to CEOs kissing its butt than kicking its ass. "VCs are taken aback," says one former VC. "The peasants have revolted against them."

He's not making any money off of it. I asked where he wants it to be in five years. "Owned by a large media company," he replied, only half jokingly. (Hey, he sold Total New York to AOL a couple bubbles ago.) Ressi namechecked Dow Jones as his preferred owner. Meanwhile, he has this little problem where he can't get VC backing. When pressed, he admitted the site is a "charity case," and there's "not enough money to make a living off of it." Still, while a quick QuantCast lookup shows TheFunded far behind Fake Steve Jobs in readership, Ressi thinks he's the man of the moment. His reaction to Wired's 3,500-word feature story in the latest issue? They should have put him on the cover. He's totally serious about that.