Venture Capitalists seldom are
It is important in life to "declare one's position" when known... in this case, my position on my theology of business. I am a devout capitalist. Much more like Hayek than Keynes on the academic spectrum of economics, whereas free markets are always better for society in the long term than government controlled policy making. One of the most important seats at the table of free market capitalism is the venture capitalist - its just too bad that most of them don't live up to what they sell and there is no one else at the table to counter-balance the bad behaviors that many of them exhibit.
Venture capitalists in the classic sense of the term serve the business world in a very important way - they assist those with ideas and a propensity for risk in achieving greatness by gambling an investment at critical periods in the entreprenuerial cycle. Disappointingly, it is ever so seldom when they actually behave in the "classic sense" - where gambling and taking risk is really at issue. Honesty, integrity and transparency are particularly sparse in this area of business. Many of them should have their hands slapped and most of them should be kicked squarely in the gonads for failing to act like adults. There are always exceptions and I will be so bold as to name a few. High on my list is Eric Hahn from the Inventures Group. In my experiences with him, Eric embodies two very key traits necessary in an mature, successful businessman: enthusiastically inspiring and a consistently straight shooter. My advice - if a VC tells you either "yes" or "no" in any of the first three meetings - they can be trusted. Those that string you along with "just one more exercise" either don't know what they are doing or they are just waiting for the game to get interesting - letting some other VC make the first move. In my experience of meeting and pitching to over 50 of them, the bulk of them take less risk than a loan officer at your local bank - which by the way is NOT at all in the risk business. They often behave as if they want to place the bet after the outcome is sure - nice work if you can get it.
For those that do not really understand VC's (and I admit my depth of knowledge is limited) - they get their investment money from pitching people with "real" money to invest a portion of their cash in what is known as high risk ventures. First, "real" money comes from investors like The Teachers Retirement Fund of Illinois ($31B fund), or the Rockefeller Foundation, or even a collection of seriously successful (or lucky) business-men/women. They must pitch an idea of being skilled at identifying a series of potentially winning companies in a given sector (telecommunications or biotech companies) and betting they will have enough of an influence over the outcome such that these portfolio companies will be successful and return a very high rate to the original investors. Realize that in some cases, this is 2% of your and my current 401K fund as managed by Fidelity or Schwab. So yes, this is construed as "widows and orphans" money and allegedly guarded as such. Maybe someone can explain why Sand Hill Road has more $100K vehicles than all of the worlds "widows and orphans" combined... yet I digress.
I am sure some will argue that VC's take all kinds of risk, the very wrong kinds of risk - the 1990s saw a great deal of alleged risk taking. This wasn't risk - it was shameful sheephearding (a far cry from shepherding - something they might think to do next time) - where VC's jumped into deals before doing any diligence simply because one of their peers said it was a sure thing they could "flip" in a few months and make 10 times their money. Guys like Frank Quattrone, a Wall Street investment banker, helped to fuel this rather insane stampede because he was in control of many of the networked deals in the valley. PBS produced "dot.con" for television a few years back which is particularly insightful.
So, what's the problem you might say? Well its simple - everyone is playing a game under the guise of being on the same team, but often everyone's interests are not only not in line but at opposition. Entreprenuers are usually interested in long term impact of their idea/business and often naively looking for a partner in the form of a VC. VC's are interested in maximizing a given fund's return in the shortest possible timeframe regardless of how you get there. Once a company is near or post going public, fund investors and Wall street analysts nearly always limit their view to this quarter's results - even ignoring company disclosure in preference to what they wish would happen (often referred to as a whisper number). The net of this dangerous game - virtually everyone is destined to be disappointed at any given point in the company's development, because what is most important to one player is often at serious opposition to another.
If all (or hell, just more) VC's behaved like Eric Hahn, or John Doerr("Kleiner Perkins) or Scott Sandell ("NEA") - and some actually do...
Venture capitalists in the classic sense of the term serve the business world in a very important way - they assist those with ideas and a propensity for risk in achieving greatness by gambling an investment at critical periods in the entreprenuerial cycle. Disappointingly, it is ever so seldom when they actually behave in the "classic sense" - where gambling and taking risk is really at issue. Honesty, integrity and transparency are particularly sparse in this area of business. Many of them should have their hands slapped and most of them should be kicked squarely in the gonads for failing to act like adults. There are always exceptions and I will be so bold as to name a few. High on my list is Eric Hahn from the Inventures Group. In my experiences with him, Eric embodies two very key traits necessary in an mature, successful businessman: enthusiastically inspiring and a consistently straight shooter. My advice - if a VC tells you either "yes" or "no" in any of the first three meetings - they can be trusted. Those that string you along with "just one more exercise" either don't know what they are doing or they are just waiting for the game to get interesting - letting some other VC make the first move. In my experience of meeting and pitching to over 50 of them, the bulk of them take less risk than a loan officer at your local bank - which by the way is NOT at all in the risk business. They often behave as if they want to place the bet after the outcome is sure - nice work if you can get it.
For those that do not really understand VC's (and I admit my depth of knowledge is limited) - they get their investment money from pitching people with "real" money to invest a portion of their cash in what is known as high risk ventures. First, "real" money comes from investors like The Teachers Retirement Fund of Illinois ($31B fund), or the Rockefeller Foundation, or even a collection of seriously successful (or lucky) business-men/women. They must pitch an idea of being skilled at identifying a series of potentially winning companies in a given sector (telecommunications or biotech companies) and betting they will have enough of an influence over the outcome such that these portfolio companies will be successful and return a very high rate to the original investors. Realize that in some cases, this is 2% of your and my current 401K fund as managed by Fidelity or Schwab. So yes, this is construed as "widows and orphans" money and allegedly guarded as such. Maybe someone can explain why Sand Hill Road has more $100K vehicles than all of the worlds "widows and orphans" combined... yet I digress.
I am sure some will argue that VC's take all kinds of risk, the very wrong kinds of risk - the 1990s saw a great deal of alleged risk taking. This wasn't risk - it was shameful sheephearding (a far cry from shepherding - something they might think to do next time) - where VC's jumped into deals before doing any diligence simply because one of their peers said it was a sure thing they could "flip" in a few months and make 10 times their money. Guys like Frank Quattrone, a Wall Street investment banker, helped to fuel this rather insane stampede because he was in control of many of the networked deals in the valley. PBS produced "dot.con" for television a few years back which is particularly insightful.
So, what's the problem you might say? Well its simple - everyone is playing a game under the guise of being on the same team, but often everyone's interests are not only not in line but at opposition. Entreprenuers are usually interested in long term impact of their idea/business and often naively looking for a partner in the form of a VC. VC's are interested in maximizing a given fund's return in the shortest possible timeframe regardless of how you get there. Once a company is near or post going public, fund investors and Wall street analysts nearly always limit their view to this quarter's results - even ignoring company disclosure in preference to what they wish would happen (often referred to as a whisper number). The net of this dangerous game - virtually everyone is destined to be disappointed at any given point in the company's development, because what is most important to one player is often at serious opposition to another.
If all (or hell, just more) VC's behaved like Eric Hahn, or John Doerr("Kleiner Perkins) or Scott Sandell ("NEA") - and some actually do...
- Entreprenuers would get a straight, honest answer as to their interest, and perhaps even helpful, coaching suggestions.
- If one of these VC's choose to invest, I would expect the entrepreneur's expectation of partner would have a good chance of being fulfilled. As a point of reference, Scott Sandell told me once that he was looking for "entrepreneurs he could work with through thick and thin, with an emphasis on thin." Anyone can work through the good times - its the bad times that most often reveal one's true colors.
- Investors would know that their money was being guarded and invested in line with their understanding of the investment fund, due diligence was sincere and the VC could be held accountable for the outcome (which of course they are paid handsomely for - often to the tune of 20% of the return plus the annual management fee of say 2.5% of a $500M fund - or $12.5M. Just think about that... that's equal to 50 people, each making $250K/year)
- The VC would be more than simply bright, but have started and run at least one business before - by that I mean been responsible for the conception and implementation of the idea as well as recruiting talent, selling to customers and for actually being the one responsible for making payroll.
After all that, I reflect... are these guys necessary? Unequivocally yes. Do the majority of them need to pull their head out of their wallet? Absolutely. My position stands - a die hard, devout capitalist I am. My recommendation: more competition breeds better service. A new kind of funding source needs to show up on the field, a sort you can trust vs. worry that when their interests conflict with yours, too bad, they win. Imagine the likes of individual with both the financial and ethical wherewithal to hold to a standard of behavior that raised the bar for all. One such character is Warren Buffet. One of his better quotes "Trust is like the air we breathe, when it's present, nobody notices. When it's absent, everybody notices." Here are a few more quotes.
