One of the most challenging elements of the venture capital business is talking about our industry in a way that makes sense, avoiding the obvious traps and the temptation to oversimplify a very complex arena. VCs and the press are both guilty of taking shortcuts to accurately portray what matters in our fascinating corner of the investment world.
Today, we see articles hand-wringing about whether there is too much money chasing too few deals; or speculating on whether there is a “shakeout” underway; or wondering what the “next big thing” is; or measuring the industry players on values such as number of deals done, or amount of money raised.
Yet, while searching for simplicity, often reports and metrics miss the real issues and trends in our business. The venture capital industry, certainly more professional and institutional than it was 10 or 20 years ago, is still not a monolithic entity, nor a simple one.
* It remains a cottage-like business in many respects.
* It continues to be a business that does not scale well (see billion dollar funds in the bubble).
* It continues to fawn over some well-known, brand-funds with track records that make you ask, “Tell me again why they are such a recognized brand?” (see public pension and endowment reports).
* It continues to be a business where natural selection takes place quietly over decades, not years. Shakeouts are only verifiable after the fact.
* It continues to be a business where riding the wave, the “next big thing,” may be useful, but backing individual companies is where the big money is made.
* It continues to be a business where the shotgun approach to deal volume can work, but only with exceptional discipline in killing off the weak deals early. Deal count is a nearly useless measure of success.
* It continues to be a business where the rifle-shot approach to deal volume can work, too. But it only works with deep domain experience and heavy hands-on involvement. Rifle shots and heavy lifting make dull copy.
* It continues to be a business where the GP/LP interface is vital, given the long, illiquid nature of the assets employed. Yet many LPs now face disclosure rules that discourage GPs from being open, or from even taking their money.
* It is a business where quarterly fund-raising amounts, quarterly investing amounts, quarterly anything amounts are worse than meaningless. They are likely to be misleading.
Both VCs and the press can do better to bring about a more balanced perspective on our industry. How do we do that? Consider these options:
* Remember that while large funds are interesting to follow, just because something is easy to measure doesn’t make it newsworthy. We must ask ourselves when size matters in venture capital and talk about size when it does, but not when it doesn’t.
* Try to avoid shortcuts by talking and reporting on things such as presumed “shakeouts” before they occur. Instead, track when funds raise money to see who is coming back to the table within a rational time, and who is noticeable by their absence. There is your pending shakeout story, with substance.
* Avoid the temptation of postulating the easy-to-promote line of the “next big thing.” Such stories play well in a bubble investing mindset, where momentum and herd-following rule the day. These are not those times. All of us need to figure out how to find and focus on major companies emerging from the technology primordial soup.
* Question whether doing lots of deals tells the public absolutely anything about a firm other than it is doing lots of deals. Do more serious analysis. We need to keep better track of what happens to those deals a year or so later. Are they getting fresh cash from new, unbiased investors or are they being nursed along by the initial VCs because they can’t tap the open market?
Time and resources limit us all. We recognize how difficult it can be to fill column inches (or is it now blog-feet)? I ask that my VC compatriots and ultimately editors stop comparing any quarterly numbers, good or bad, to any others in venture capital. Start analyzing in increments of years (at a minimum) as awkward as that may feel.
This is a fascinating, frustrating, rewarding industry. The better we explain its real workings, and what really matters, the more meaningful our industry and the press coverage of it will become.
Chad Waite is a General Partner at OVP Venture Partners.