Adeo Ressi, founder of the very interesting TheFunded.com has posted slides from a talk he delivered at HBS on the venture model. This is a great contribution and hopefully the start of a healthy and public dialogue. The slides are not easy to digest on a standalone basis, but if you take the time you will learn some interesting things.
1. The IPO market has been really poor for 8 years. The venture industry appears to still be coasting on the dotcom craziness from 98/99 and has struggled and will struggle to come anywhere near that level of success. Reminder: Sarbanes-Oxley is a big reason for the 05-07 issues.
2. There are 4800 firms (perhaps nationally, but maybe globally). Sometimes the world feels like it’s Sequoia, KPCB, and Benchmark, but there are many, many firms. Of course, this creates huge inefficiencies.
Adeo’s background slides don’t do justice to his very good reccomendations. He has a firm grasp of industry challenges and he knows current process often retards startup momentum. His solutions:
1. Fewer Funds to eliminate the chaff that raised capital
2. Standard terms to yield more efficiency and reduced legal fees.
3. More investments in many more companies.
4. Restructured management incentives.
Here are my 3 observations though I could write about this for a week:
1. More investments means more work. Venture capitalists believe they add huge value (more than their money) and therefore won’t spread themselves too thin. In general Venture capitalists work hard, but it’s not investment banking or management consulting. They don’t work 75 hour weeks. Usually, VCs are older, wealthier and their pace is different. Unless Adeo wants the 1000 great firms to hire more professionals, fewer firms will result in fewer investments.
2. Venture investing is a very lucrative profession once you reach a critical mass of capital in a fund. A firm that manages $100mm is collecting $2mm just to run itself and that’s only from one fund. Most firms manage at least two funds over a 10 year period with maybe 4 or 5 years of overlap. These firms have few professionals and very little support staff. Salaries are high. Carried interest pays them very well — if they succeed. Obviously, if the fund returns are poor, then the partners will have to find new employment, but that’s years and years later. Adeo wants them to change their incentives and there may be a window for that during this recession. But this will depend on how limited partners deploy their power. Will lps force vcs to change? I hope so, but have not seen that during my career to date.
3. I don’t think fewer funds are the answer. Diversified investing approaches are far, far more important. The groupthink issue really plagues the industry. How many video startups raised money during the YouTube phenomenon? Highland Capital and General Cataylst, once revered Boston firms invested in Going.com so they could have a social network in the portfolio. It’s astonishing how fads get followed. Paul Graham writes about this subject better than anybody. VCs are not known for their creativity. Now there are exceptions and a younger generation is far more experimental. You can see Fred Wilson, Brad Feld and Raj Kapoor to a little think differently and try to free themselves from the groupthink. But these are the exceptions more than the rules.
Josh Kopelman, the most creative VC/Entrepreneur I have met, wrote an interesting post about how venture firms can really differentiate by creating “structural advantages.” In First Round’s case, there might be hope, but for the most part firms struggle to do this well. I’ve been to a half-dozen firmwide meetings that were excellent networking events, but did not benefit my startups. I think TheFunded should explore structural advantage as litmus test for funds.
Adeo is onto something big with his presentation. Venture investing will change over the next 20 years. When and how will be the subject of many posts to come on YallaGuy.
Filed under: Uncategorized | Tagged: Adeo Ressi, Brad Feld, early stage, First Round Capital, Fred Wilson, Josh Kopelman, paul graham, Raj Kapoor, sarbanes oxley, TheFunded, TheFunded.com, Venture Capital, Ycombinator |