VC Industry


There has been much discussion in the past few years of the changing structure of the venture capital industry.

On the surface the narratives have been

The rise of “micro VCs” or seed-stage funds
The rise of alternative sources of capital (crowd funding and the like)
The poor performance of the asset class (this analysis has largely been wrong as I pointed out here –> most analyses were clumsy rear-view mirror looks at the data)
We are in a bubble (with so many private $1bn+ valuations)

15 years ago we were at the peak of Internet hype with the launch of many over-capitalized businesses with a market size & opportunity was limited.

Where are we today?

50x more Internet users (2.4 billion)
Online connections that are 180x faster (10.5 Mbps)
Always-on connectivity of mobile (164m US smartphone users)
We’re all socially connected (so great businesses spread faster)
We all have one-click purchase power (Apple, Google, Amazon, eBay)
The VC market has right-sized (returned back to mid 90’s levels & less competition)
Lower costs to start a business (95% reduction), many more companies created & funded by angels / seed
But it still takes VC to scale a business (thus large capital into industry winners like Uber, Airbnb, SnapChat, etc)

It doesn’t take a huge leap to see how well the VC industry is positioned for the immediate future. Limited Partners or LPs (the people who invest into VC funds) have taken notice as 2014 is by all accounts the busiest year for LPs since the Great Recession began.

You can read the narrative I’ve outlined below. If you want to watch a quick 9 minute video in stead I’m now including the video version of my presentation which was shot at the PreMoney conference

[Note

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I was having dinner with a friend last night and we were chatting about venture capital and a bit about what I’ve learned. I started in 2007 with a thesis that my primary investment decision would be about the team (70%) and only afterward about the market opportunity (30%).

I was telling him that it was much easier when I started because there were fewer deals, life was less public and somehow the world seemed to be spinning more slowly. A year into my tenure the world went into economic collapse and that seemed to dominate the consciousness more than which deals one was chasing.

Today we’re in a world where 10 accelerators are bombarding you with emails to meet their 10-15 companies. Seed investors are aplenty and of course they need downstream money to fuel their early-stage bets. Angels have been prolific for years now and they, too, rely on downstream money to cover their bets.

And we live in public so many people are able just to reach out.

And there’s conferences. Oh, the conferences. Disrupt. Recode. Web Summit. Collision. Fortune Brainstorm. Lobby.

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Tom Perkins is one of the founding members of the venerable venture capitalist firm Kleiner Perkins. He just had his Mitt Romney moment and his name will forever be etched in the collective consciousness of the tech community for this terribly insensitive and tone deaf letter to the Wall Street Journal.

The headline of Mr. Perkins letter to the WSJ?

Progressive Kristallnacht Coming?

“I would call attention to the parallels of Nazi Germany to its war on its “one percent,” namely its Jews, to the progressive war on the American one percent, namely the “rich.””

Um.

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Picking a VC is hard. You don’t really have much to go on to decide who would make a good fit. Reputation of firm? Of partner? Deals done in your industry? It’s a bit of all of these.

I had an enjoyable conversation this morning with a young team straight out of college this morning and they were calling to ask advice on how to approach fund raising (angels vs. VCs, how to select a VC, etc.) and I realized that without years of experience it is tough to answer this question.

So I thought I’d write about out with what I would look for in a VC knowing what I know now and why.

Brains?
Most VCs are book smart. It’s insanely competitive to get into our industry so most have degrees from institutions like Stanford, Harvard, Wharton and University of Chicago (blatant plug ;-). Smart is simply not a differentiator. In fact, book smart can be a negative. The last thing you want is a know-it-all telling you what to do when they are at 50,000 and haven’t had to deal with your exact circumstances.

I call them “VCs Seagulls.” (you know … fly in, shit on you and then fly away).

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In my recent post “Why Am I So Lucky? Why You Need to Be Sure You’re Not the Sucker” I talked about how VCs (or other investors) get deals sent to them and how to interpret a referral.

I tried to make a simple point: People have motives when they send you a deal. Sometimes those motives are positive (they really want the chance to work with you, they think you have unique skills) and sometimes they are less positive (their first-tier of “go to” referrals passed on the deal, they don’t want to write another check themselves, etc.).

As I said in the post, I really appreciate referrals and I take meetings introduced to me from a wide variety of people. I simply wanted to make the point that if a deal referral seems “too good to be true” it probably is. If the deal is from out of your geography and/or out of your focus area or a deal is being referred by a well-know investor who normally co-invests with similar syndicates – at least ask yourself, “Why am I so lucky to be getting this call.

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By now you will likely have read Andy Dunn’s scathing post about Venture Capitalists in which he decries the industry’s masses.

I read Andy’s post with a knowing smile on my face. After all, I am no stranger to publicly expressing the frustrations of dealing with the downside of this industry as I wrote about in 2006 when I was an entrepreneur.

But VC is like congress. It’s easy to hate it en masse yet many people love their local congressman.

Why?

Because they know him or her. They see how hard she does her job. They know her personally and know she cares about her constituencies even if she has to make tough trade-offs from time-to-time.

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