Archives For Venture Capital

First, read this post.

A couple of my close friends, Mark Solon and Roger Ehrenberg, have tweeted this article with the endorsement MUST READ. I’m as much (or more) of a fanboy of Steve Blank as anyone, and I think the world needs more straight talk and demystification of the VC/entrepreneur relationship. Having said that, this seems like such an obvious point that to make it feels more like sloppy demonization than analysis. By these lights, customers are not your friends, partners are not your friends, employees are not your friends and your lawyer isn’t your friend (even if it’s Ed Zimmerman and he’s gotten you drunk on $350 bottles of wine.) If you are expecting someone, in a business context, to do something against their own fiduciary duty and self-interest, then you are in for a rough ride in this world, whether you raise venture capital or not.

Mark and Roger, you are both colleagues and friends. If I have a company in trouble (which I never do, of course), can I count on you to lead their next round at an uptick, based on our friendship? NO? Well, hot damn, I thought we were friends.

Power vs. Influence

Matt Harris —  November 19, 2010 — 2 Comments

Earlier in my career I worked at a large private equity firm (in my view, one of the great ones: Bain Capital), and for the last 13+ years I’ve worked in early stage venture capital. Those two ways of investing, ie buyouts vs. early stage venture, have lodged in my mind the subtle distinction between power and influence.

As a general matter, private equity or buyout firms purchase 100% of their portfolio companies, while venture firms purchase minority positions (though over time and across syndicates, venture capital ownership in aggregate often exceeds 50%). In one sense, the difference between 25% ownership and 100% ownership is just a math difference, particularly when you consider the various “control provisions” many VCs put into their terms, in practice the difference in governance style is (or at least should be) radically different.

I was reminded of this distinction twice yesterday. The first was in a conversation with a search and HR consulting firm, whom I greatly respect. This particular firm works nearly exclusively with private equity funds, but in this case was interested in working with one of our portfolio companies. It slowly became obvious to me that the firm thought they were in my office to make the sale, ie, that I was positioned to decide to use them for a search at one of our portfolio companies. I hastened to make it clear to them that they were in the wrong office, and that the team at the company would make the decision, and at most I would have input, or influence. The second conversation was with an outside director candidate, where similarly I had to make it clear that while my opinion mattered, ultimately we were looking to the management team to lay out a strategy for building an effective board, with our guidance.

I would contrast this with the typical process at a private equity firm, where quite literally the management teams at the portfolio companies work for the private equity folks. That’s a fine arrangement, and probably appropriate for more mature companies, but that would be a terrible outcome for an entrepreneurial, venture-backed company. Any entrepreneur who wants a “boss”, in that sense, is probably not the right person to execute the kind of high risk, high growth innovation that is the underpinning of a successful venture.

The fact is, there is really no sense in which any of my CEOs work for me. From a user experience perspective, most of the time it presents as though I work for them … most of my job consists of helping them meet their objectives, rather than the other way around. (Though, of course, by helping them meet their objectives I sneakily achieve mine, which is to own good-sized chunks of valuable companies.)

While proudly acknowledging that I don’t have any real power, I do think in most cases I have a reasonably amount of influence. I guess, to paraphrase WHEN HARRY MET SALLY, I am the dog in the scenario above. Management teams clearly have the prerogative to go against any opinions I may have, and all of my good ones commonly do that. But it is the case that the stakes of doing so and consistently being wrong about it grow higher over time. Hopefully, in addition, I’ve gained some level of influence just by having a degree of credibility with regard to certain aspects of building companies in my lane (financial services industries).

Lest anyone read this as a venture capitalists currying favor with entrepreneurs (not that I’m above that…), I should admit that my strategy here isn’t just about being a good guy and empowering management teams as a value in and of itself. I do it because I think it’s more likely to make money. Ultimately, my view is that power and accountability go hand in hand. To the extent to which I, as a director and venture capital investor, am making decisions at or for one of my portfolio companies, I am taking on accountability for the outcomes. To the extent to which I take on accountability, I am removing it from the management team. My view is that accountability shared is accountability lost, and a lack of accountability is the first step on the road to ruin.

I was talking with one of my favorite entrepreneurs the other day, who was trying to choose a lead for his next financing round.  This is a guy who had plenty of options.  Facetiously, sort of, he said he was planning on picking the VC who had the most unique visitors to his blog.  That, of course, sent a chill down my under-publicized spine.  Again, i think he was kidding, but also kind of not.  He went on to explain that his biggest single job, and therefore problem, is recruiting, and a VC who can help him tout his company, and add credibility simply through association, is a major asset.

My response:  kill me now.

The fact is, relatively few venture capitalists I know went into this business because they were self-promotional.  Most of us are geeks who like technology and like hanging out with people who create new things.  The overlap between that personality type and the kind of folks who go on reality TV shows is roughly zero.  Despite that, a wave has hit our industry; a wave that previously hit the media industry and will go onto spill more broadly into corporate America.  The old methods of being successful, which were predicated on hand-crafted, person-to-person networking and leveraging the brand name of your firm, have been supplanted by the need to build your own profile online.

This has been playing out in the media for a few years.  As the traditional media brands totter and cast about for a business model, the onus has fallen more on more on the “talent” to forge relationships directly with their audience.  It is less the case that George Stephanopoulos works for ABC than that he leverages his position at ABC to build a profile for himself (and garners nearly 2MM followers on Twitter in the process.) The days when a cub reporter could get a job at the New York Times and simply do good work are, sadly, behind us.  That cub reporter had better be on Twitter, Facebook, Tumblr, etc, building an audience and creating quasi-personal relationship with her followers.  When her contract is up, she had better be able to point to the thousands of people who will follow her to her next gig.

This is becoming more and more true in the venture business, starting with those VCs that invest in social media, and moving beyond that sector.  This trend has challenged some of the incumbent leaders, many of whom are still on the sidelines as it relates to social media, and created room for new players.  Mark Suster is relatively new to the venture business, but has build a profile for himself that is second to few.  Having said that, I’ll bet if you quizzed 100 of his Twitter followers, fewer than half could name the firm he works for (GRP, by the way, who have been killing it lately.) This is a disruptive moment for our industry, and the new leaders will be individual VCs, rather than firms.

What’s next?  I think corporate America.  As with media and venture capital, right now having a well-known social profile is just an opportunity, not a threat.  Tony Hsieh at Zappos created equity value for his shareholders by being early and compelling on Twitter, but other CEOs are not yet feeling the pressure to follow.  That will change.  In 10 years, I believe that consumers will bias towards buying products (and retail investors will bias towards buying stock) from companies whose CEO they “know”, and have an online relationship with.  Personal publishing will move from being an opportunity, to a competitive advantage, to an absolute necessity.

As for me, I feel late but I’m running quickly.  Twitter is a better fit for me than blogging, as my musings tend toward the short and insubstantial.  [I feel certain my partner Bo would interject here that “short and insubstantial” could actually BE my personal brand].  I had a meeting today with an angel investor who I’d known previously only through Twitter, and I felt like we skipped forward at least two meetings worth, based on seeing each other’s faces every day.  I love the opportunity to praise and comment on my companies.  I continue to believe that there is no substitute for the “old” ways of doing things:  doing great deals, being a good guy and getting out and meeting people.  But there are new ways, too, and we ignore them at our peril.

The End of Management

Matt Harris —  August 23, 2010 — 2 Comments

An important article appeared in the WSJ over the weekend called “The End of Management”. [apologies in advances if they kibosh the link; trust me, it was epic]

The basic thesis is that given decreases in coordination costs, the costs of scale have begun to outweigh the benefits of scale, calling into question the entire idea of the corporation.  Interestingly, the subtitle is “why managers should act like venture capitalists”, but I’m more interested in the implications of the piece for the venture capital industry itself.

The fact is, the venture industry has matured, and matured in a somewhat of a mediocre way.  Economic theory and history would suggest that the industry should consolidate around a few large firms.  In fact, the dominant trend is the opposite … many large firms are losing “customers” (both investors and entrepreneurs) and shrinking/going away, while the firms taking market share are relative newcomers (see:  the Book of Dixon and the Book of McClure).

The unfortunate facts of the case for large venture firms are that scale has gone from being a significant advantage to being a crippling disadvantage.  The same problems that beset large corporations (bureaucracy, principal/agent mismatches, the inability for small wins to move the needle, the inability to pick a focus and win a particular segment) are plaguing large venture firms in spades.  The benefits of scale (deep pockets, brand name, the experience of having lived through cycles, robust compliance/regulatory/back-office infrastructures) are real, but are less important in an era where those things can either be obtained through relationships, bought on a variable cost basis or built quickly and cheaply.  Or, somewhat cynically, be systematically discounted and disparaged by more nimble competitors, such that they at least appear not to matter.

One interesting example of this is the question of experience.  Fred Wilson has a thought provoking post about the impending adolescence of the current burgeoning crop of start-ups.  He notes one fund he is an investor in who has called down 40% of the fund in the first 6 months.  Anyone who was in the business in 1999 knows the kind of frenzy that drives that type of activity, and fears it.  Fred can get away with this type of avuncular commentary, but this kind of talk from a GP at a mega Sand Hill Road firm would be treated as condescension and “not getting it”.

At Village Ventures, when we got started in 2000, it was the era of the mega-funds.  Our thought was that there was a way to get the benefits of scale without the costs by creating a platform of shared services and a forum for sharing experience and resources, and offering that to smaller funds, who could be nimble and focused.  10 years later, we have 15 firms on the platform, with almost $1B in capital under management, and a strong track record of performance.  We’ve made our share of mistakes but I still think the idea is right.  I continue to think that ignoring all of the benefits of scale is a mistake, and that there are ways to harvest them without the sclerosis of being too large (Fred’s wisdom about pacing and reserves being one example).

The most interesting thing about the article, and about the current trends in venture capital, is that they hold the potential to be secular trends, not just cycles.  The skeptics (usually me) tend to see such phenomena and say “ah, just wait until Sacca et al raise their $500MM funds, so they can ‘participate more fully in the pro rata rights they are creating’ … and then raise a hedge fund so they can buy at the IPO as well”.  I don’t think that will happen, and if it does, that will be the road to ruin for them as well.  For my money, in any of the digital disciplines, small funds are here to stay.