Adeo Ressi

Adeo Ressi didn't choose to serve as the representative of entrepreneurs. But the creator of the venture capital rating service, TheFunded, and the recently launched business incubator, The Founder Institute, is certainly enjoying the role. The way Ressi sees it, the days of entrepreneurs getting shafted and left behind are over.

Last week, Ressi and crew announced plans to open a branch of The Founder Institute in Seattle. Ressi will be in town tonight to talk about the 4-month long entrepreneurial training program at an informational meeting at the University of Washington.

We chatted with the 37-year-old Ressi -- who sold his previous gaming company to RealNetworks -- to find out why he thinks the current venture capital model is broken and what he's trying to do to fix it. He also addressed some of the critics of TheFunded and why now might be the best time to start new tech companies. Excerpts from the interview below:

What will the venture capital landscape look like in five years? "Right now, I advise all founders in the program to avoid raising capital until they really have something substantive to show because I believe that the venture capital bubble has burst. You are seeing, really, a historical level of consolidation, and so I think within five years there is going to be dramatic substantive change of the venture capital model. And the way that change looks is really detrimental to entrepreneurship. The changes that are happening as you and I speak on this phone are extremely detrimental to both entrepreneurship and innovation. If I were to rate my concern level for the state of venture capital right now, it would be a 10. Ten meaning bad or serious or grave. So, I am taking serious personal initiative to correct the dire state of affairs."

What's wrong with the venture capital business? "The LPs, the limited partners, are pulling out of venture investing at a staggering rate... The faith is shaken for good reason because the underlying model has been abused and is flawed. People are rolling $600 million funds every couple of years with a 2 percent management fee -- so they are making tens of millions of dollars a year to run these funds with absolutely no correlation to whether those funds make returns. That just seems irrational."

What are you doing to fix that? "What I am doing, and I guess you are the first person I have told this about, officially, is ... for the first time that I know of in history I am bringing together a prominent group of limited partners, general partners, essentially venture capitalists, and entrepreneurs to have a discussion about the future. And that event will be in February and it is called The Future of Funding."

How do you view your role in the transformation that is occurring in the venture business? "Essentially as a mediator and a catalyst, but I am also the representative of the entrepreneurial perspective, which I feel at the end of the day has been completely lost in all of the discussions. Essentially, because the venture capitalists are far more organized than entrepreneurs and the LPs are far more organized than the entrepreneurs, the entrepreneurs have never had a representative at the table."

And now they do through TheFunded and through you? "I have essentially decided, well if no one else is going to be the representative, I will be the representative. And I don't mean that in a conceited way. It is just that I completely understand why a startup founder who is working 80 hours a week is not representing the interests of entrepreneurs.... Let me be the first to say if someone else wants the job, they can apply."

What do you say to VCs who don't like the concept of TheFunded or complain about the negative ratings? "Every LP makes their present day investment decisions by factoring in data from TheFunded, so (the VCs) should be cringing if they are not treating their entrepreneurs correctly, then they are not going to raise a new fund. Period. It is that simple. So, they should be worried if the the 13,000 CEO members of TheFunded don't have a collectively favorable view of them. They are in trouble."

On VCs becoming more transparent: "But there's an easy way to fix this. If the venture funds actually published their return data. But because venture funds keep their return data largely secret and refuse to agree to common reporting standards ... the only source of data that LPs have is TheFunded. So, they essentially make TheFunded powerful through their own secrecy and oblique performance. And may I add, I am the only person I know that is trying to look across limited partners, general partners and entrepreneuers and who works most of every day trying to fix this dynamic, which is broken. They should be thankful that A) The Funded exists because it is the only source of information that LPs have to make investments decisions outside of self-reported data from the funds themselves, which I am not saying is bad, but there is no third-party, objective standard of reporting. And, second, if they do well on TheFunded, it almost guarantees their success. So, it is the only vehicle I know of, that if a fund is at the top of that list, it is pretty certain that they will raise capital and they will get the best deal flow. Period."

Could The Founder's Institute be viewed as competition to some of the other venture models out there? "I am not competitive because I don't take an investment position with cash. I am not competing, in fact I defer to their valuation by using a warrant vehicle."

So, what's it like trying to work with venture investors given your somewhat negative perception in the business? "I deal with the top 30 funds who appear on the home page of the site and are quite happy with TheFunded because it has changed their reality for the better. It provides a quality filter. And here's the other thing, for those who can get out of their own way in being frustrated, again TheFunded can be a good tool for them because if they do their job well it can guarantee their success."

On the economy and what it means for new startup businesses: "I am an optimist and I do believe that the funding situation will improve... It is easy to build a fast-growing business when the entire economy is growing fast, because you grow with it. It is hard to build a fast-growing business when everything is tanking. Whether it is the bottom or close to the bottom, you are going to ride a wave upward at some point, so now is as a good a time as any to start."

Why did you create The Founder Institute? "(At the Funded), we take about 200 CEOs every day who apply and we only let in between 10 and 20 percent of those applicants. The difference between the people we admit and don't admit is the level of experience they have and their relative ability to be successful in raising capital. We said, 'what can we do with the 180 or 190 CEOs every day who don't get into the site?' And we thought long and hard about how we can help them. And that was the genesis of the Insitute, because we felt the best way to help CEOs that don't have a lot of experience would be to put them through a training program. And when we looked at that, the best way to run a training program was to have other founders -- and other CEOs -- show them the ropes."

Why training programs and why are you setting them up in certain geographies? "Times are changing constantly, so the circumstances today if I am starting a business are much different than a year ago. So, if you want to help people build relevant and meaningful companies, they need relevant and meaningful mentoring from people who are succeeding in the current market at the current time. And then, not only that, really it is location specific as well because a successful person today in San Diego or Seattle or Washington D.C. is probably operating in a different way than -- let's say someone in San Francisco -- because the markets are inherently different."

Why set up a branch of The Founder Institute in Seattle? "There's no question that Seattle is a hotbed of innovation. You obviously have a few of the largest companies like Boeing and Microsoft with great engineers ... and you have a flourishing gaming industry in Seattle as well. We feel that the market is ripe there, just given the large talent pool that Seattle has and I am sure there are a lot of people thinking about starting a company."

Ressi

How many people will be in the program in Seattle this winter? "It is hard to predict because the Seattle market is large, but at any one time there's only a certain number of people thinking about starting a company. I'd be really happy if there are 30 founders in the program, but it could be as large as 50 if everything goes well."

Talk a little bit of the economic incentive in this program and how that works with the common pool of equity split amongst people in the group? "I've looked at incubators very carefully since 1999 ... and what generally happens ... with incubators and accelerators is that they make an investment, and that immediately troubles the waters.... By not directly investing at first it attracts a wide range of companies, and what we do is we introduce those companies to the appropriate investors to make sure they get fair market value for their idea.... Obviously, when you try to create a training program, you want to incentive all of the stakeholders to success... So, we thought long and hard on how to do this, and what we ultimately decided to do was to allow everyone -- all of the stakeholders -- to share in the success of the companies created. This is classically called an exchange program where a group of people contribute stock into a pool and then the success of one benefits them all."

What's the structure of that look like? "So, we give 30 percent to the founders, 30 percent to the mentors, 25 percent to the person who operates the local chapter and the Institute keeps 15 percent. The Institute runs the warrants pool, which we refer to as a bonus pool, for many years and we send checks as these companies grow and achieve liquidity to the various parties."

How do you pick companies to get into the program? "We don't pick companies. We pick people. We don't ask applicants for a business idea. We only ask them for what they are passionate about.... We put the applicants through a combined personality and aptitude test and based on the caliber of their application and the results of the test we admit people into the program. So, what's interesting is, there is absolutely no idea selection by us. We don't care what your idea is."