Saturday, May 12, 2012

Response to comments: Training VCs

Many of the comments on yesterday's post were about training future VCs, or not. Both Brad Feld and Fred Wilson said they did not have junior VCs because they did not want to burden entrepreneurs with inexperienced VCs. This makes a ton of sense. But, then, where should experienced VCs come from? Andy Weissman comments that perhaps VCs are best trained by being entrepreneurs.

You either believe that Venture capital is not a profession--i.e. there are no special skills or knowledge needed that can't be picked up as you're doing the job--or it is. If it is then it looks like the best firms are akin to 'boutiques' in other professions. In fact, almost all the firms are akin to boutiques in other professions. Of course, in other professions boutiques are formed by people who were trained at the mainstream firms. If there were no mainstream firms there would be no people to form boutiques.

Law firms train lawyers. Accounting firms train accountants. Banks train bankers. Even advertising agencies train advertising people. VCs by and large do not train VCs. Maybe VC is not something you can learn by just doing VC, although Fred is a prominent counter-example. Professions train professionals partly because they think their professions are important, so they feel the obligation to pass on embedded knowledge to the next generation. And partly because they can skim some of their underlings' earnings (thus the pyramid structure of professional services firms.)

VC does not have the pyramid structure of some professions, like law or accounting, where most tasks can be delegated with oversight to junior people. So it's true that junior people in VC probably would cost more than they generate if they were truly being trained (as opposed to just cold-calling and spreadsheet-jockeying.) But if we care about entrepreneurs, as we all profess to do, we should want not just the best for today's entrepreneurs, but also for tomorrow's.

If you do, and still don't think training VCs is worthwhile, then it must be that you simply do not believe that VCs can be trained, that VC is not in fact a profession at all.

I do not think this is true. The best--in fact almost all--VCs have historically come from one of five places: VC, banking, law, technology firm management, or journalism. Check the VC genealogy to confirm this. (I don't think any journalists are represented there, but Mike Moritz is a prime example.)

Each of these paths teaches people some of the necessary skills to be a venture capitalist, but not all of them. Witness Kleiner's and Perkins' struggles as they started out, making ridiculously wrong bets on markets they did not understand. Or the revealing comment Fred Adler made* about two of his partners that left to start their own fund: "These fellows came out of Citicorp where they were quite senior and they didn't go through [my] intense interrogation" justifying the investments they were making. The implication being that the two partners did not know enough to make good investments and Adler did not feel they would accept his instruction since they were so senior. In other words, being senior at Citicorp had not taught them all they needed to know to make good venture investments. Those two partners must have learned something on Adler's dime though, because the fund they started was Accel**.

Many venture capitalists made similar mistakes early on. The ones that didn't seemed to either have extensive angel investing experience (and so their early mistakes are not part of the record) or they "played the follower strategy" (as Wilson has it) and managed to get into more experienced VC's deals in order to learn the business.

So if specialized knowledge is needed, how to generate it? Kauffman has their Fellows program to train VCs. Andy thinks being an entrepreneur is the best training. I disagree with both. I think only doing the job teaches the job. And since no one wants anyone doing the job who doesn't know the job, this means a long apprenticeship. But the best VCs seem to not be interested in having apprentices. So, then what?

In my opinion, if we want better trained VCs, then either the culture has to change so VCs feel an obligation to train the next generation***, even though it costs them money, or the LPs need to start looking out for their future returns in addition to their present ones and compel VCs to have a bench. It would be interesting to hear from experienced venturers how they learned the business.

* Quoted in John Wilson's The New Venturers.
** Wilson's book was published in 1985, Accel was founded in 1983, so Wilson had no way of knowing that Accel would go on to be one of the premier venture funds. This just makes the quote that much better.
*** I would be happy if VCs would even just blog more with other investors as the audience, instead of writing the same frickin how-to posts for entrepreneurs over and over. The world does not need another "How to Read a Term Sheet" post, it really doesn't. It could, however, use a few more "How You Will Get Screwed if You Write a Bad Term Sheet" posts.

Friday, May 11, 2012

On fixing VC ourselves

What good is it for me to sing helplessness blues
Why should I wait for anyone else?
- Fleet Foxes, Helplessness Blues

That's for Fred Wilson.

In his post last month "Can the Crowd Be More Patient", Fred says
We need new medical approaches to preventing and/or curing disease. We need new scientific approaches to generating, storing, and being more efficient with energy. Maybe we need more space exploration. Maybe we need more undersea exploration.
He says this in the context of not being able to fund these things because that is not what venture capital is. But you know what? At this exact point in time Venture Capital can be whatever Fred says it is. If he wants a 20 year fund instead of 10, he could raise it. He wants an evergreen fund? He can do that. I think he could probably raise a fund to do whatever he wants.

So I'm not sure what he's saying. But if what he's saying is that these things are not fundable, no matter the time frame, that they are simply bad early-stage investments, then I strenuously disagree. Investing in the things that make our collective lives better--the very things we think of as progress--should be the only good investments. Venture capital is a means to an end, that end being the commercialization of innovation that makes our lives better.

Here's a thought:
Entrepreneurship is a self-actualizing and a self-transcending activity that—through responsiveness to the market—integrates the self, the entrepreneur, with society. Unavoidably, therefore, entrepreneurship is an exercise in social responsibility. To suppress or constrain innovation and improvement—and their implementation—ignores a society’s needs and wants, holds it back, and diminishes its future. Entrepreneurship is the unique process that, by fusing innovation and implementation, allows individuals to bring new ideas into being for the benefit of themselves and others. It is sui generis, an irreducible form of freedom.
That's from the Kauffman Foundation's 2008 report on Entrepreneurship in American Higher Education [pdf]. Meanwhile, this week Kauffman had a new report [pdf] that--as Ed Zimmerman had it--blames investors in VC funds for being co-dependent enablers of bad VC behavior (for the tl;dr, see Fred Destin's excellent post on the report.) I've heard a lot of opinions on this report: some agreeing, some denying Kauffman's conclusions (for instance, Brad Svrluga's rebuttal.) But while the degree to which venture investors are doing a bad job is arguable, the fact that, as a whole, we are is not.

Nice as it would be to agree with Kauffman and say "I'm doing a bad job because I'm being managed poorly," that's no excuse. Every VC I know complains about bad practices in the industry, because bad venture capital practices affect us all. And while the bad behavior might make short-term economic sense, as outlined in Kauffman's report, I am not in this for the money and neither is anyone else I know.

Yes, I want to make money; in fact, I need to make money if I'm going to keep investing, I'm also competitive by nature and making money is how we keep score. And then, if it's true that the market ends up choosing companies as winners because they are the ones that contribute most to societal growth, then making money is not a bad metric in the long-term. But the real reason I'm in the business is that I want to contribute, I want to be useful. "Entrepreneurship is an exercise in social responsibility." That's what I want to enable. Every good VC I know feels the same way, but almost all of them feel helpless to change the current broken incentive model.

How would we do that, as venture investors? I'm sure there are smarter people than me thinking about this, but here are a few ideas.
  1. Change LP Behavior.

  2. I agree with Kauffman about misaligned incentives, not that my agreeing is going to change anyone's behavior except my own. But if Fred Wilson and his ilk agree with Kauffman, then it does make a difference, if they want it to. Fred talks his talk in public and he walks his walk in private, so maybe he's already in the process of convincing LPs to accept a different model so he can make the investments he thinks make a difference. I hope he is. And I hope he's not just volunteering USV, but the whole industry. When you're really good at something, explicitly raising the bar for the entire industry is a killer strategy, so convincing LPs to hold VCs to a higher standard would just be good business for him.

  3. Professionalize VC.

  4. One of the odd things about venture is the lack of seriousness about what we do. Venture is the only professional services business which does not think training its employees is a good idea. Witness Brad Feld's comment--ironically, in the textbook that Kauffman asks its Fellows to read--"We don't intend to hire associates and train them; [when we retire] we are just going to shut shop and go home. Done!" This après moi le déluge attitude means that our industry continues to be half-staffed by people who half know the job. I am constantly amazed at the crazy things other angels do, usually sins of omission, and VCs I know express the same sentiment about other VCs. In no other profession do they expect people to just show up and do the job well. In our profession many show up and do the job poorly. We all suffer. If we care about innovation--not just making money--we should be training people how to invest in and manage investments in startups.

  5. Think bigger.

  6. Wired publishes "When Will this Low Innovation Internet Era End?" at the same time as the Guardian has an article called "Has the Internet Run Out of Ideas Already?" Rick Webb calls a bubble in the very part of the startup world that has the least to do with societally useful progress (progress defined as improving GDP per capita and thus living standards.) Fred's complaint: it's true.
    As an industry, we are funding too many ideas which do not make a difference. We can take pride in helping build companies that create jobs. But creating jobs is not as good a goal as we make it out to be if those companies and those jobs disappear three years later. Jobs come and go, but technological progress is forever. Funding progress makes a difference. This is not a "they promised us jetpacks" rant. Jetpacks are stupid. I don't want a jetpack. I don't want you to have a jetpack. I think all of us having jetpacks would not make the world a better place in the least**. That's not progress. Google was progress. Twitter is progress. These are tools that enable us to think better, to communicate better, to find the things we need to know more efficiently.
    Paul Graham had a post on "Frighteningly Ambitious Startup Ideas." I think that his ideas as a whole were not ambitious enough. A new search engine, replacing email? OK, those are big ideas, and they're ideas a small team can make progress on over the course of a YC session. But the big ideas are more akin to his latter ones: a wholesale reconfiguration of existing industries that suck, efficiency-wise or societally: Hollywood, medical care. I like companies that are trying to destroy and replace our most hated industries***. But there's big and there's bigger. How do you create a company that doesn't solve a specific problem but rather makes us better at solving problems in general?
    Google and Twitter both make us better at solving problems. They don't just make us more efficient, they make us more efficient at finding efficiencies. They are tools to make our brains better. But they are primitive tools. We should be building companies that make us--as a species--more creative, better problem solvers. Our bottleneck in making more progress is ourselves as people: we can not on our own think any harder or better. Where are the startups that change that? I don't want a company that cures a disease, I want a company that helps researchers figure out how to cure diseases. The best, and best returning, industries that venture capital has funded have done just this: the computer industry, the biotech industry. These were meta-tools.
    What's the next meta-tool? If I knew I'd be building it. I don't know. So instead I spend my days looking for the type of people who think they do know. That is the job of the venture investor. We need to do more of this, and less of what we are doing now.
Kauffman's report implicitly suggested that there should be only 20 funds, each of $400 million or less. If this advice were taken, the venture industry would be a fifth the size it is today. Almost all VCs would be out of jobs. Entrepreneurs would be back in the bad old days when ARD funded DEC with $85,000 and received 70% of the company in return. No one wants that, except maybe the LPs, but that's what is in the cards if that's what it takes to make the investment class work. To avoid that, we--the venture investors--need to do better and we need to do it preemptively.

We are not helpless, we should not wait for anyone else.

* Many small companies do make a difference in people's lives, and certainly do so in the aggregate. But in some sense it's just as much work to build a small company as a big one. My philosophy is to aim for the moon and land on the roof: a big idea can produce a moderate size outcome or a big outcome; a small idea can produce a small outcome and that's it. Many entrepreneurs I've worked with have showed up with a modest idea. I've pushed them all to be wildly immodest--there's always a big idea surrounding a small idea, go for the big idea.
** Just go buy yourself a Ducati.
*** My current bets are in banking, mobile telecomm, and, of course, advertising.