So You Want To Write About Venture Capitalists

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So You Want To Write About Venture Capitalists

Gary Rivlin has a story in today's New York Times titled "So You Want to Be a Venture Capitalist".

It's a good story line. It goes like this. Everyone wanted to be a VC in the late 90s. A bunch of big names tried it and didn't make it. The proof - they are now gone from the firms that hired them.

The problem with the story line is that its based on a small sample size of exactly three, Mitch Kapor, David Beirne, and Stewart Alsop. And it uses the past five to six years as the time frame for the story.

I think the reality is very different. All three of these guys are very talented people and would make great venture capitalists under different circumstances.

I think you need to look a lot more factors than Rivlin did to understand these stories.

The first place you need to look is at the firms. NEA, Accel, and Benchmark are big firms now. Each manages a large pool of capital and has a large investment team operating out of mutilple offices. I am not suggesting that such a structure is bad, but it does tend to create a hierarchy and a structure that often is not the best environment for learning the VC business at the partner level.

I couldn't help but wonder if a smaller, more collegial partnership might have worked better for all three of these three guys.

The next thing you have to look at is the time frame. Anyone entering the VC business at the tail end of the last bubble would have failed miserably. If you did a lot of investing in 1999 and 2000 and that was the start of your venture track record, you'd have a hard time justifying your returns to anyone.

The fact that these three guys put up bad numbers in that time frame means that they performed about the same as everyone else in the business.

Finally, you need to look at the people. I don't know any of these three guys very well. I've met them all at least once but I can't speak to their talents as investors. I suspect they didn't love the venture capital business. Many people who have been very successful in other tangential businesses decide to get into the VC business and find that they don't like it. They leave and move on to other things.

I suspect that is what is going on with these guys. Learning how to be a VC is tough. And not everyone is good at it. But I also think that it is a business you can learn to be good at if you love it, and if you give it time, and if you are in the right partnership. These ifs didn't add up for the three guys in Rivlin's story, unfortunately.

UPDATE: Silicon Beat says that Gary Rivlin is going to have a monthly piece on venture capital in the NY Times. I hope Gary's future work is better.

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» So You Want To Write About Venture Capitalists? from SiliconBeat
Speaking of the NYT's Gary Rivlin and his penchant for spilling blood, his story today about "tourist VCs" is just such an example of blood-letting. He uses three people as his sample, Stewart Alsop, Mitch Kapor and David Beirne. He begins his tale wit... [Read More]

Tracked on May 23, 2005 8:32:28 AM

Tracked on May 23, 2005 12:02:25 PM

Posted May 22, 2005 in Venture Capital and Technology

Comments

"All three of these guys are very talented people and would make great venture capitalists under different circumstances."

You could say the say thing about the many entrepreneurs who lost their jobs during the same bubble period.

Being an entrepreneur -- or a person who invests in them - carries high expectations. If you fail to meet those expectations then you risk losing your job.

Posted by: Mon | May 23, 2005 3:15:00 PM

you are correct that the sample size is only three. but looking at our own firm we have about 25 investment professionals, and about 20 of them have joined the firm since 1999. a few partners have retired, and exactly two have made it from associate to partner in its 25+ year history.

from where i am sitting, the assertion that this is a very high turnover business is a very accruate one.

Posted by: another.vc | May 23, 2005 5:29:08 PM

I think the real story is that it is still unclear what makes a good seed venture capitalist. Basically, to pick a good start-up you supposedly need good deal flow, a fair amount of luck, strong negotiating skills, and a lot of intuition.

I guess.

But unlike later stage financing, I think picking early stage companies really is much more an art than a science -- and I am not sure there is really a lot of "skill" here. Not like, say, how Warren Buffet has "skill" at picking stocks.

If all the numbers are pro forma, and the market size is unknown -- you are basically using a lot of intuition. I have been through the process of getting a company funded by VC's, and pitching a fantasy cartoon show for kids to network executives -- as far as I can tell, the decision making process is basically exactly the same -- everyone is really just guessing that it feels like a hit.

Now one can make a valid argument that what separates the good VC's over time from the bad ones -- is exactly what separates good poker players from bad one -- they know how to play a mediocre or bad hand. They can recognize early that the team is bad, or the timing is wrong, and they can get the thing sold to a sister portfolio company, or talked up by analysts until the quiet period is over -- or even completely change the business model. They can make something good out of nothing, by putting in an extraordinary team, or orchestrating some great bus dev deals. But interestingly, we don't seem to recognize these skills as important. We think the genius is the guy who funded eBay.

And, unlike say, a good poker player, I think it is still very hard to separate the lucky VC's from the bad ones, or the talented ones because one huge hit screws up all the numbers, they don't get to make a big number of bets, and the odds of hitting aren't very good to start with.

If a good VC can reduce his chances from 1 in 10 to 1 in 5 -- well, Kapor invested 5 times and was 0 for 5 -- the sixth one might have been the one. Of course, a better VC might have been able to turn around on of those five companies before they hit the wall, but who has time when you are looking for the next eBay.

On the other hand, you have a guy like Steve Jurvetson -- extremely smart, well connected, top of his class at Stanford-- he hits a homerun at his first at-bat -- hotmail, and he is crowned a name partner. But he later funds some absolutely bizarre companies and people -- businesses that didn't have the first idea how they were going to make money.

As a lifetime achievement, he is undoubtedly still way up -- and success tends to breed success in VC -- you get better deal flow, etc. He certainly has my respect. But I think it is also really hard to say he wasn't just extremely lucky in drawing a pair of pocket aces on his first hand. Its not that hard to play aces.

Finally, that Beirne wasn't a great VC is an old and common rumor in Silicon Valley --but its not clear to me that he didn't add a ton of value through his rolodex in recruiting for Benchmark portfolio companies.

I always found the rumors ironic because Benchmark always made such a big deal about how they invested as a team-- based on their individual strengths, and wasn't about any particular member's solo performance or portfolio. It sure rang hollow then, and still does.

Posted by: Croesus | May 23, 2005 5:51:38 PM

A VC

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