Читать книгу The Business of Venture Capital - Mahendra Ramsinghani - Страница 46

6 A Business Where Enemies Accumulate

CHALLENGES OF A VC CAREER

Steve Jobs was not impressed by venture capitalists and once said of VC that it “sounds like a bullshit job to me.”¹ Ironically, this was reported by none other than Sir Michael Moritz, who was then a journalist and would become a venture capitalist and chairman of Sequoia Capital. Of his own experiences as a VC, he would say, “Every day is composed of a hundred soap operas — it's an exhilarating place to live and work.”²

As a venture capitalist, you are not creating anything new, but rather fueling the creation of new innovations and businesses. Often regarded as a commodity, a VC is often compared to a role of a slick, glorified financier — most of whom take credit for the entrepreneur's successes and hide their losses or blame them on others. On the other hand, some practitioners find a way to take credit for all successful outcomes.

This chapter looks at a few challenges of being a venture capitalist.

Emotionally and Intellectually Demanding, a Business of Thousand Nos

The business calls for a mental tenacity — not becoming exhausted by the times you must say no to entrepreneurs, turn people down, or turn someone's great idea down without being abrasive. Roelof Botha, Partner at Sequoia Capital says:

Friends come and go; enemies accumulate. At Sequoia, we meet with thousands of companies every year, and only partner with 15–20. That's thousands of interactions where we run the risk of making a negative impression. Regardless of whether we end up partnering with them, we always want founders to know we respect them and their ideas. I'm mindful of how I treat people and I think about the long-term consequences of my interactions. The people we meet with will tell others about their experience, good or bad.

To handle multiple investment opportunities and complex situations; to maintain your drive and discipline; to prioritize tasks; and to be comfortable with ambiguity are the hallmarks of this profession. “I have stopped trying to manage my calendar,” says Jack Ahrens, a VC of 30 years. “Rather, I keep a prepared mind for emergencies that may arise on any day.”

Source: Bob Mankoff/Cartooncollections

High Level of Churn

Once you get in, staying in the business of venture capital is easy only as long as you can generate superior returns. Successful practitioners continuously need to adapt themselves to economic cycles. Besides performance, the business is rife with partnership challenges, greed, and politics. Often, people leave and firms fall apart.

Performance of Partner

The one and only measure of the business is financial returns. Returns are a function of capital invested and time. Time is your enemy. As the clock keeps ticking, the measure of performance — internal rate of return (IRR), which is a function of time — keeps dropping. Worse, in bad markets and recessionary times, the ability to exit an investment slows down, not to mention the potential value of the return. But investors really don't care for any excuses. When asked what keeps him up at night, Roelof Botha of Sequoia Capital said, “Suffice it to say that you're only as good as your next investment.”³

Performance of Funds

In a world of one-hit wonders, consistency matters. Top-tier venture capitalists who generate returns get to raise their next funds quickly and charge higher profits — as much as 30 percent, as opposed to the standard 20 percent. Marc Andreessen once said, “I don't believe there is such a thing as a VC industry. There are about 40 firms that really do well as investors and over 600 firms that will break your heart as an investor. A handful of firms generate all the returns and a lot of firms want to generate those returns.”⁴

The Business of Home Runs

Only a small number of startups are meant to be successful. The same goes for venture firms. I expect most VCs to fail. The entire business is about finding exceptional, awesome companies. If you find one of them every five years, nothing else matters.

—Mike Maples, Floodgate Fund⁵

Market Forces

At times, changes in market trends can hurt highly specialized firms. Not too long ago, clean-tech investments were at an all-time high. As the waves receded, the green practitioners had to tweak their resumes. Some repositioned themselves as generalists. Others went back into the technology sector and sought “clean web” opportunities. Often, when technology/software investments are on the upswing, life science sectors take a beating. Technology sectors have a shorter path to exit, while the time horizon of life sciences investments is longer, often mired with technological, regulatory, and financial risks.

No Payday

Of the 8,000 practitioners in the business in the United States, very few have seen any financial profits, or as they say, a “carry check.” In other words, most practitioners have survived on salaries coming from management fees. This is yet another cause of heartburn for VCs who feel frustrated that their bets have not paid off fast enough, and for limited partners (LPs), who think incentives are misaligned when VCs get paid fees for poor performance. One investor with over nine years of experience says, “We need to own up to the fact that there may never be a big payday.”

Ego, Greed, and Intellectual Dishonesty

Any LP will regale you with stories of bad VC behavior. But at its very core, what irritates these investors is how VCs play around with numbers to bloat their performance. It's an age-old tactic: slice and dice the data to make sure your performance looks good and then find the next sucker who can invest in the fund. VCs, with their inflated egos, hubris, and biases, rarely do a mea culpa. No VC in their right mind will say, “We lost your money and we learned a few lessons.” Often, VCs find someone to blame for poor performance. Several limited partners described this behavior as disingenuous. A fund of funds (FoF) summarized it as the Lake Wobegon⁶ effect, where in a VC land, all the women are strong, all the men are good looking, and all the children [and all the venture capitalists] are above average.

VC CAREER AS A CALLING

The VC business is subject to pressures from multiple ends: the supply of capital, the availability of investment opportunities, liquidity time frames, and regulatory dynamics. Elizabeth “Beezer” Clarkson, managing director of Sapphire Ventures Fund-of-Funds, says, “Often, you don't know if it's you or its luck. Having humility is essential.”

In any career where those two imposters of fame and fortune prevail, you can be assured of petty politics, backstabbing, and opportunistic behavior. Ego, greed, and hubris have often turned practitioners into primal beings — ask any founder and they will share plenty of VC horror stories.

Being Reasonably Nice Can Be a Competitive Advantage

I've heard entrepreneurs say, “I don't want to talk to that firm because they are such jerks.” In almost all cases, these are well-known, older firms who come from the era when capital was scarce.

Every experienced entrepreneur I know has a list of ‘toxic’ VCs they won't deal with. There are still plenty of VCs to pitch to get a fair price for your company and only deal with decent, helpful investors. It sounds kind of crazy, but being a reasonably nice person has become a competitive advantage in venture capital.

—Chris Dixon, partner, Andreessen Horowitz⁷

At its core, venture capital is truly an apprenticeship business. It takes years of mentoring to learn how to assess investment opportunities, set pricing, and strategy, build and motivate management teams, deal with inevitable and unpredictable threats to the businesses, source additional capital and strategic partners, and finally, divest (for better or worse) these illiquid investments. “The good ones view it as a calling, not a career,” says Diana Frazier of FLAG Capital Management, a fund of funds.

Singer Bob Dylan once said, “I accept chaos. I'm not sure it accepts me.” That sums it up nicely — you can accept venture capital, but will it accept you?

NOTES

1 1. Michael Moritz, Return to the Little Kingdom: How Apple and Steve Jobs Changed the World (New York: Overlook Press, 2009), 89.

2 2. Inside the Minds: Venture Capitalists (ebrandedbooks.com, 2000).

3 3. Blake Masters, “Peter Thiel's CS183: Startup — Class 7 Notes Essay,” April 26, 2012, blog, http://blakemasters.com/post/21869934240/peter-thiels-cs183-startup-class-7-notes-essay.

4 4. Marc Andreessen, “A Panorama of Venture Capital and Beyond.” Stanford University's Entrepreneurship Corner, May 13, 2010, http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2457.

5 5. Tarang Shah and Sheetal Shah, Venture Capitalists at Work (New York: APress, 2011).

6 6. A fictional town in the US state of Minnesota. Garrison Keillor made this term popular as he reports the news from Lake Wobegon on the radio show A Prairie Home Companion.

7 7. Chris Dixon, “Being Friendly Has Become a Competitive Advantage in VC,” January 29, 2010, blog, http://cdixon.org/2010/01/29/being-friendly-has-become-a-competitive-advantage-in-vc/.