I think about the future of Venture Capital a lot (day and night) and how we can continue to drive and fund innovation. And I have said many times that “the quality of the deal intake is only as good as the quality of the investor”, which specifically in venture means that an investor needs to have the experience and foresight of an entrepreneur to support others.
Raise the (public) value of innovation
Clearly with truckloads of money from Limited Partners over the last ten years, more highly skilled global entrepreneurs than ever, and 5/6th of the world population still void of essential technology applications, VC has done a deplorable job in the matchmaking process between the assets of the Limited Partner (money) and the assets of entrepreneurs (ideas), which should have tapped into that massive greenfield more aggressively.
Less than 10% IRR for more than 10 years, or to use another worrisome statistic: less than 3% of dollars invested in VC over the last ten years leads to the production of any public value by way of IPO (Initial Public Offering), as 10 years of VC investing at $200B/year (give or take) x 10 generated $66B in IPOs (per Dan Primack, PEHub). No wonder the Limited Partners who fund VCs scratch their heads at what just happened to their money.
It’s all about the Benjamins (and the quality of people behind the money)
I referred to Albert Einstein before (way back in 2006) and an amusing article from Dave B Lerner turning Sherlock Holmes into a VC reminded me how the principles of Einstein should be held against the selection process for General Partners (GPs) at a VC fund.
Quotes from the Genius
So, with Einstein’s Wikipedia encyclopedia at hand let’s roll out some of his famous quotes and see how the current state of venture stacks up:
“Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world”.
So why do GPs demand to see a product demo before they can decide to invest, is it because they have no imagination? Perhaps we should encircle a world of innovation that is bigger than Silicon Valley?
“For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution. It is, strictly speaking, a real factor in scientific research”.
Why a SuperBowl ring is so much more valuable than an Ivy League ring, in any job in the venture business.
“A new idea comes suddenly and in a rather intuitive way. But intuition is nothing but the outcome of earlier intellectual experience”.
Why relevant entrepreneurial experience is such an important attribute to a VC investor, intuition not analysis drives the selection of rewarding investment decisions.
“Whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed”.
Silicon Valley has commoditized the investment thesis (or what we refer to as the-same-difference investment thesis), no surprise that it cannot detect disruptive innovation even if it would show up at their doorstep.
“Falling in love is not at all the most stupid thing that people do — but gravitation cannot be held responsible for it”.
GP should not be afraid to feel passionate about their companies and make independent investment decisions (that may not find other syndicates), but the gravity of investment commoditization can not be held responsible if they do not.
“It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience”.
Customers need simpler technology solutions, not more complex. As investors that means we should not invest in technology, but the application of technology to meet customer needs. But not so simple that it has no macro-economic and public relevance (IPO).
“Humanity has every reason to place the proclaimers of high moral standards and values above the discoverers of objective truth”.
A higher moral standard in the venture business would ensure that we deploy free-market principles to the support for innovation. We are far removed from deploying transparency to the venture business that would expose the true merit of investors with the true merit of entrepreneurs. Only then will the truth reveal itself.
“A happy man is too satisfied with the present to dwell too much on the future”.
GPs locked up into 10-year fund vintages are fat and happy, too happy to dwell to much on the malaise in venture.
“The state of mind which enables a man to do work of this kind is akin to that of the religious worshiper or the lover; the daily effort comes from no deliberate intention or program, but straight from the heart”.
Great convictions from the heart lead to great investments and financial returns in venture. The investor who is content with the current investment program will soon meet his maker.
“I am by heritage a Jew, by citizenship a Swiss, and by makeup a human being, and only a human being, without any special attachment to any state or national entity whatsoever”.
We are citizens of our world, so perhaps we should start investing that way. We need to get away from Sand Hill Road more often and tap into global resources, not just to fund entrepreneurs but also to experience and understand what drives global marketplaces.
“Concepts that have proven useful in ordering things easily achieve such authority over us that we forget their earthly origins and accept them as unalterable givens. Their excessive authority will be broken”.
Just because we have constructed the relationships between Limited Partners and VCs in a certain organized fashion does not mean we should accept them. Especially not when performance proves the vast majority of those relationships do not work out to satisfaction.
“Great spirits have always encountered violent opposition from mediocre minds. The mediocre mind is incapable of understanding the man who refuses to bow blindly to conventional prejudices and chooses instead to express his opinions courageously and honestly”.
Entrepreneurs should expect to receive violent opposition from mediocre VCs (who focus on technology builds), but entrepreneurs should remain courageous and honest. Courageous in their entrepreneurial ideas and honest about their ability to build them.
“The important thing is not to stop questioning; curiosity has its own reason for existing”.
Many people take for granted what has been imprinted in their brains from childhood, but you would be surprised to learn how many of those things are actually false. Not by design, but by interpretation. Drill deep in what you have been told as the truth and you will find new opportunities for innovation.
“Nature shows us only the tail of the lion. But I do not doubt that the lion belongs to it even though he cannot at once reveal himself because of his enormous size”.
A Long Tail without a Torso is meaningless.
“What is thought to be a “system” is after all, just conventional, and I do not see how one is supposed to divide up the world objectively so that one can make statements about parts”.
“Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions”.
The social environment on Sand Hill Road that has perpetuated the mediocrity in venture is preventing GPs from expressing opinions about how it should change. In fact, none of the Limited Partners I spoke to have received a viable plan from VC as to how to combat the venture malaise we are in.
“My political ideal is democracy. Let every man be respected as an individual and no man idolized”.
When you do not belong to the (subprime) “venture club” or play their game, you are not let in and respected. So why should we repay that homage back with idolization?
“The really valuable thing in the pageant of human life seems to me not the State but the creative, sentient individual, the personality; it alone creates the noble and the sublime, while the herd as such remains dull in thought and dull in feeling”.
Meritocracies are created by transparency, we have none of in venture. No surprise it is dull in thought and dull in feeling.
“My passion for social justice has often brought me into conflict with people, as did my aversion to any obligation and dependence I do not regard as absolutely necessary”.
Free-markets are created by meritocracies that rely on transparency. The social justice of a meritocracy is hard to grasp for those who hide behind walled gardens to protect their own insecurities.
“Mistrust of every kind of authority grew out of this experience, a skeptical attitude toward the convictions that were alive in any specific social environment — an attitude that has never again left me, even though, later on, it has been tempered by a better insight into the causal connections”.
I mistrust many venture investors for good reason (their lack of merit), but have learned that the casual connection is the dysfunctional financial system that allows VCs to take it for a ride.
“Everyone is aware of the difficult and menacing situation in which human society — shrunk into one community with a common fate — now finds itself, but only a few act accordingly”.
Waiting, talking and reporting about the malaise in venture is one thing, offering solutions to it is another.
“The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of the evil”.
That is of course because the only form of capitalism we practice today is far from a meritocracy. Capitalism spawned by meritocracy is a wonderful thing and builds opportunity for all people with merit (within the Long Tail and the Torso).
No need to be Einstein to become a VC
Einstein himself did not think he was special and neither should a VC. All you need to become one is solid early stage experience and a vivid imagination of how the world should work.
Yet to make venture work, Limited Partners need to start by deploying money to GPs who themselves have proven how those crucial attributes helped them cross the chasm, before those GPs are allowed to tell other entrepreneurs how to do the same.
My investment and drive is for democracy, meritocracy and capitalism to work hand-in-hand to produce the powerful innovation that enhances the lives of people around the world. Until that happens, I leave you with a last quote from the Genius himself: “To punish me for my contempt of authority, Fate has made me an authority myself”.
Happy New Year!