So what is VC investing like today? The one thing that is hard to appreciate until you are doing it, is the magnitude of the deal flow. This is simply drinking from a fire hose. You see new deals every day, occasionally a dozen new deals a day at a pitch conference. But an active early stage fund may only close a financing on one deal a month and an active partner may only do one deal a quarter. So there must be an aggressive triage process to whittle down the hundreds of new deals down to the one you will devote significant time to. Being a VC means very aggressive time management --- you have to, or your life turns into an endless series of digressions. (It sort of looks like my desk, with stratigraphic layers of papers and ppts, but that is another story.)
In passing, this is one reason that VCs often seem to ignore entrepreneurs and aren’t polite enough to even say no. They live in a deluge, and can’t spend too much time responding to each submission. If they did, they would have no time for follow up study and pursuit of the best deals they see.
At the risk of trivializing what I do, in some ways, my VC life reminds me of the time back when I was a kid and an avid coin collector. My dad had this giant jar of coins and once every month or so, I would get access to it and avidly sort through the coins looking for the proverbial 1947 D Lincoln penny in “Fine” condition. I had a book of pages with little round slots numbered with all the preceding years and mints and variants, and I was always trying to fill every hole with a better example of that coin.
And my attention was inordinantly driven to penny-collecting because during the Second World War, in 1942, due to a shortage of copper, the U.S. Mint made pennies out of steel for one year. Some of these steel pennies were still in circulation when I was a kid, and to a coin-oriented kid such an obvious anomaly suddenly appearing in your hand made the whole idea of coin collecting just fascinating.
So there is my Dad's bottle, and initially every coin looks roughly the same. Some are a little shinier, but at first they blur together. You looked sequentially at each coin and roughly evaluated it: what was its year and its mint stamp, what condition was it in, was there anything special about that year… You put aside maybe 1% of the coins as possibly worthy of further study, while the rest went into rolls to be taken to the bank. Then you took the promising ones and did “due diligence” on them, comparing to your previous best coin in each category, and looking them up in the coin collectors handbook. Rarely, and with great pride, you would replace a coin in your collection with a newly found one. Some people looked at different coins, i.e. nickels, dimes, silver dollars (different investment focus areas). Some people went to shows and shops and traded for already discovered coins (later stage investors). I liked the adventure of searching for coins in general circulation, gleaning value from the worldly flow. I confess I would sometimes go to the bank and buy rolls of coins, scan through them, and then return the leavings. (I recall my local bank began to take a dim view of this after a while. Fortunately, a lot of my relatives had bottles of coins.)
I liked the penny business. The upfront cost was low, the deal flow was high, and yet if you found a 1909 VDB, it wasn’t worth 10% of what an equally rare dime was worth. Suddenly a coin’s value became detached from its face value. It wasn’t even proportional. It was all about uniqueness and rarity, and diligence, luck, perceptiveness and knowing when to flip them…
Friday, August 31, 2007
Wednesday, August 15, 2007
From Angels to Professionals
In some ways, Venture Capital seems like a bank, accepting deposits and making loans, but this venture capital business is more focused both in what it tells its investors it will return to them, and how it will do it. And the goal is subtly different: the focus is on appreciation of equity value, not generating income. VC’s don’t want dividends or profits so much as they want to sell (or distribute) their stockholdings at a big profit over what they paid for them at the outset.
From the post war era and the early Venrock, the next jump is to raising a fund from a diversified group of investors, instead of a single individual or trust. In other words, we go from investing from one’s own money, to investing OPM (other people’s money). It isn’t clear to me who first made that transition (and I’m not trying to write the definitive history here, just outline some trends). I’ll mention the early firm of Davis & Rock, because they were very early, and because I had the pleasure of counting Arthur Rock as an investor in one of my startups in the early ‘90s (I wish I had returned more to him). He was a crusty and demanding investor but fair and focused.
Venture Capital is “bank-like” in the simplest terms --- you collect funds from depositors, use those funds to create profit, and return much of that profit to your depositors. What is important to me here is the types of skills needed in the early days to be a venture capitalist. You needed people who could raise money, and people who could invest it wisely in ventures that would grow enormously. I have the impression that in the early days, the technology was not that deep, and a well-educated individual, particularly one with an engineering background, could sufficiently fathom the core technology in most startups to make intelligent decisions. Maybe that is from the benefit of hindsight. To the earliest investors in Digital Equipment Corporation, the mini-computer may have seemed like quantum computing.
But one change from the early days to the late 20th century is the increasing specialization of the venture professionals and their frequently narrower technical focus. Most of the successful VCs in the 1980’s and 90’s have technical backgrounds and engineering or science degrees. Often they began their careers in those fields, graduated to management positions, and then transitioned into the venture capital field in mid-life.
As venture capital became an established and respected profession, generating sometimes huge success stories, the major business schools began churning out MBA’s that were educated expressly to become VCs. I remember encountering these young VCs starting in the late 90’s. Frankly I was not particularly impressed. As a seasoned entrepreneur, it was somewhat strange to be evaluated and judged by a young VC who had never hired (or fired) someone, made (or missed) a payroll, created a product (or category). The older style VC was much more credible if they had “done it” themselves. Particularly in the evolutionary 90’s, it wasn’t clear to me that you could educate someone to be a VC. There were exceptions, of course, but generally I was always more impressed by VC’s with operating backgrounds and technical depth.
Arguably, as we underwent the revolutions of the Internet and mobile communications and mapping the genome, young, freshly-minted MBAs had at least one advantage over older school VCs --- they often WERE the target demographic, and had grown up with these revolutions. But it is hard to underestimate the value of having BEEN an entrepreneur, and having started and run a company in your past.
So here we are today. Most funds are investing OPM, other people's money, under fairly standardized financial structures, in fairly well defined technical market areas that jive with their team expertises. VCs are frequently technical, often have operational backgrounds, but the younger VCs are more likely now to be educated as MBAs and to have jumped right into the field. More in my next post on speculating where the VC world is headed…
From the post war era and the early Venrock, the next jump is to raising a fund from a diversified group of investors, instead of a single individual or trust. In other words, we go from investing from one’s own money, to investing OPM (other people’s money). It isn’t clear to me who first made that transition (and I’m not trying to write the definitive history here, just outline some trends). I’ll mention the early firm of Davis & Rock, because they were very early, and because I had the pleasure of counting Arthur Rock as an investor in one of my startups in the early ‘90s (I wish I had returned more to him). He was a crusty and demanding investor but fair and focused.
Venture Capital is “bank-like” in the simplest terms --- you collect funds from depositors, use those funds to create profit, and return much of that profit to your depositors. What is important to me here is the types of skills needed in the early days to be a venture capitalist. You needed people who could raise money, and people who could invest it wisely in ventures that would grow enormously. I have the impression that in the early days, the technology was not that deep, and a well-educated individual, particularly one with an engineering background, could sufficiently fathom the core technology in most startups to make intelligent decisions. Maybe that is from the benefit of hindsight. To the earliest investors in Digital Equipment Corporation, the mini-computer may have seemed like quantum computing.
But one change from the early days to the late 20th century is the increasing specialization of the venture professionals and their frequently narrower technical focus. Most of the successful VCs in the 1980’s and 90’s have technical backgrounds and engineering or science degrees. Often they began their careers in those fields, graduated to management positions, and then transitioned into the venture capital field in mid-life.
As venture capital became an established and respected profession, generating sometimes huge success stories, the major business schools began churning out MBA’s that were educated expressly to become VCs. I remember encountering these young VCs starting in the late 90’s. Frankly I was not particularly impressed. As a seasoned entrepreneur, it was somewhat strange to be evaluated and judged by a young VC who had never hired (or fired) someone, made (or missed) a payroll, created a product (or category). The older style VC was much more credible if they had “done it” themselves. Particularly in the evolutionary 90’s, it wasn’t clear to me that you could educate someone to be a VC. There were exceptions, of course, but generally I was always more impressed by VC’s with operating backgrounds and technical depth.
Arguably, as we underwent the revolutions of the Internet and mobile communications and mapping the genome, young, freshly-minted MBAs had at least one advantage over older school VCs --- they often WERE the target demographic, and had grown up with these revolutions. But it is hard to underestimate the value of having BEEN an entrepreneur, and having started and run a company in your past.
So here we are today. Most funds are investing OPM, other people's money, under fairly standardized financial structures, in fairly well defined technical market areas that jive with their team expertises. VCs are frequently technical, often have operational backgrounds, but the younger VCs are more likely now to be educated as MBAs and to have jumped right into the field. More in my next post on speculating where the VC world is headed…
Friday, August 10, 2007
In the Beginning...
If I’m going to address the evolution of venture capitalism, it will probably help to first establish a context and starting points for this ongoing evolution. Starting enterprises is arguably the “oldest profession”, since the first prostitute probably needed seed capital to dress up for marketing to her first “sale”. OK, a poor joke… But in the modern era (i.e. the last 100 years) entrepreneur seed capital begins as angel behavior. At first you probably had to have money to start something new. You self-funded your new ideas. A good example might have been Thomas Edison. He made enough early money that he could afford to personally incubate ideas from his fertile mind. And he could borrow ideas from outside, improve on them and spawn another business. It’s my relatively uninformed opinion that this is how it gets started. Wealthy industrialists fund new ideas --- think Andrew Carnegie, Henry Ford. The seed capital comes from insiders and largely from themselves.
Wikipedia has a nice article on Venture Capital. It seems to suggest a second source of seed capital that it doesn't call out explicitly, e.g. the government, especially during extraordinary times such as WWII. The military had to create industries and suppliers from scratch to meet its needs in major defense projects. Think about the creation of atomic weapons, and all of the various components and materials that had to be created from out of the blue. General Leslie Groves was effectively a venture capitalist with a bottomless Limited Partner in Washington.
Wikipedia credits General Georges Doriot as the father of modern venture capital. My guess is that he got the idea from his experience in the wartime years, where the audacity of the military meant starting things from scratch under duress. Doriot was clearly a well versed business professor, having taught at the Harvard Business School, but I’m guessing it took the audacity of war to break through to the idea that you could start a company entirely from scratch, and do this as a repeatable business.
So we begin with wealth, expansive thinking, audacity. This is an angel dominated world. Wealthy people spending their money to make them more money and expanding their legacy. But in my mind, modern venture capital begins when you have professionals investing other people’s money. This seems to first happen with Venrock Associates, which starts as a group of professionals investing the Rockefeller fortune. Laurance Rockefeller starts it off, but he quickly hires pros to manage it.
Frankly this is the beginning… a couple of senior management types helping their boss, Rockefeller, to be a better angel investor.
Wikipedia has a nice article on Venture Capital. It seems to suggest a second source of seed capital that it doesn't call out explicitly, e.g. the government, especially during extraordinary times such as WWII. The military had to create industries and suppliers from scratch to meet its needs in major defense projects. Think about the creation of atomic weapons, and all of the various components and materials that had to be created from out of the blue. General Leslie Groves was effectively a venture capitalist with a bottomless Limited Partner in Washington.
Wikipedia credits General Georges Doriot as the father of modern venture capital. My guess is that he got the idea from his experience in the wartime years, where the audacity of the military meant starting things from scratch under duress. Doriot was clearly a well versed business professor, having taught at the Harvard Business School, but I’m guessing it took the audacity of war to break through to the idea that you could start a company entirely from scratch, and do this as a repeatable business.
So we begin with wealth, expansive thinking, audacity. This is an angel dominated world. Wealthy people spending their money to make them more money and expanding their legacy. But in my mind, modern venture capital begins when you have professionals investing other people’s money. This seems to first happen with Venrock Associates, which starts as a group of professionals investing the Rockefeller fortune. Laurance Rockefeller starts it off, but he quickly hires pros to manage it.
Frankly this is the beginning… a couple of senior management types helping their boss, Rockefeller, to be a better angel investor.
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