After having spent a couple of years as a junior VC, I think I’ve figured out the real problem facing the venture capital industry. It’s just too damn fun (and a bit too glamorous, in that geeky kind of way.) Too many people want to do it, particularly successful entrepreneurs.
It’s funny. When I was a VC one of the questions I asked startup founders/entrepreneurs was what their long-term career goals were. Usually they responded something about growing and leading a large and successful company - the answer most VC’s want to hear. However, a not insignificant number of repeat, successful entrepreneurs often spoke of eventually selling their company and then, with a misty look in their eyes, “maybe getting into venture capital.” This happened regularly enough that I went through several stages of reaction to it during my time as a venture capitalist.
When I first started hearing this desire my initial reaction was, “hey, I want to grow up to be a VC, and you’re probably going to be better than I am at it, why don’t you stick to being an entrepreneur and not take my spot?!?” After hearing this response from a number of entrepreneurs I began thinking something different, “dang, if all these people get into venture capital there is going to be a glut of venture capitalists.” Of course, I recently noticed that there ALREADY is a glut of venture capitalists and not enough good CEO/founder-types (yes, I’m a bit on the slow side; it’s probably been like this since before I started my career.)
When pundits talk about the problems in the venture industry, they usually talk about how the incentive model for venture capital funds is messed up, and how venture capital fund managers can grow rich off of the management fees. This is true, but I get the feeling that people drawn to the industry only for the sake of money usually end up, if they are good, raising larger and larger funds. This effectively makes it too hard for them to do smaller investments and thus they evolve into later-stage funds or barbell-funds (funds that do some token number of smaller, early stage deals but who deploy the majority of their capital into later-stage or buyout investment.)*
Over the past couple of months several new funds have been announced. Some of these funds were founded by entrepreneurs who I have heard of - legendary people who any startup would love to take capital from. Others have been founded by successful technology executives who I had not known of before, but who have tremendous backgrounds. Any startup would also love to be associated with one of these groups. But in a world where there are not enough novel ideas nor enough great entrepreneurs but where there is too much capital…
I guess my message to all those want-to-be VCs who are currently entrepreneurs. Yeah, venture capital is ridiculously fun. But so if golf. So take up golf. (joke!) My real message is that successful entrepreneurs who want to get into venture capital may find better returns, and just as much fulfillment, investing their own capital as an angel investor. There has been a lot of talk in the startup community about a “funding gap” that exists between small friends and family angel rounds and true Series A investments; investment sizes in the half million to just over a million dollar range. I think that filling this niche could be just as glamorous and fun as doing whatever it is that VC’s do - and this would help solve a real problem, vs. entering the already crowded venture capital market.
And to limited partners: be thoughtful as you invest in new funds. Successful entrepreneurs can become great venture capitalists, but do you have to fund ALL of them? What about backing some angel funds and then agreeing to support the best portfolio companies via direct investing in Series A rounds? When I was at Summit Partners there were several large investments where major limited partners invested alongside Summit so that the deal would not have to be syndicated with other funds. Could this model, which is pretty well known in the buyout world, be extended to earlier stage investing? If you really trust the angel fund executives, and you only invest in their very best deals, then you can bake out some of the risk of doing shotgun-style VC investing on your own, avoid paying some management fees AND perhaps not contribute (as much) to the glut of venture capital on the market.
I would love to hear people’s thoughts and comments! Am I off target here, or does any of this make sense?
*I am purposfully ignoring the late 90’s or early 2000’s, when I think lots of groups raised bigger and bigger funds because everyone else was doing it.
