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VC Cliché of the Week
My partner Brad was the first person I heard use this cliche. It's a good one.
When a venture firm makes a lot of relatively passive investments it's called "spray and pray".
I think there are two ways to approach the early stage venture business.
You can make a small number of investments and become actively involved in the development of the companies.
Or you can make a large number of investments and let others worry about the development of those companies.
Both models work.
You cannot make a large number of investments and become actively involved in the development of the companies because there isn't enough time for an experienced VC to do both well.
And you cannot make a small number of investments and let others worry about the development of those companies because your fund's performance is too dependent on each investment to sit back and let others do the work.
The spray and pray model works particularly well in up markets like we are in right now. It does not work well in down markets like we had in 2001-2003 because when there is hard work to be done and every company in your portfolio is in crisis mode, having lots of portfolio companies is a real problem.
I am a fan of the small number/active involvement approach and that is what we do at Union Square Ventures. We plan to make four new investments per year. We might do one more or one less depending on other circumstances, but that is our ideal investment pace. Two deals per partner per year is a pretty well understood metric among venture firms who take the active involvement approach to the business.
There is another benefit to the small number/active involvement approach. When you do have winners, the community (other VCs, entrepreneurs, employees, etc) knows that you and your firm were are part of the success and there is "franchise value" to your firm for that investment.
That doesn't happen with the spray and pray approach. When you spray and pray, your firm becomes more associated with access to capital and less associated with the other things a venture firm can bring to the table.
All that said, I think that spray and pray oriented firms can put up good returns and have done that over the years. They benefit from both portfolio diversification and increased odds of being invested in the really big winners that don't come very often.
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Posted February 8, 2006 in Venture Capital and TechnologyComments
I think the posting of this cliche explains your investment in Feedburner nicely :)
With more and more firms raising larger and larger funds, do you think that spray and pray vc's will continue to consistently put up good returns?
Posted by: Fraser | Feb 8, 2006 9:28:09 AM
I agree that these are two viable strategies. But there is a gradient of possibilities of involvement that can be taken by the VCs. This can go all the way from a hands off approach as you suggest to actually running the company and being its management. I would argue that for most companies to truly benefit from VC financing, the VC needs to maintain some distance from the company or else they risk being sucked into believing the story and lose their objectiveness which is required when things aren't going so well and the company needs to be refocused (or abandoned).
Darren
Posted by: Darren Fast | Feb 8, 2006 12:49:29 PM
Great take on these popular VC strategies! On the Go BIG Network (http://www.gobignetwork.com), we see our VC members using several models including "spray and pray", especially with the current market. However, there's still something to be said for the standard small portfolio/hands-on approach. It seems to be an effective portfolio strategy in nearly every economy.
Posted by: Ryan Mapes | Feb 8, 2006 12:50:19 PM
West Coast vc call DFJ "sprinklers". We were one of the companies (ChiliSoft) that got the benefit of that in 1997. It worked for us and DFJ in that case. Frankly, I think there's not enough sprinkling going on for startups. PITA to raise smaller sums.
Posted by: Charlie Crystle | Feb 8, 2006 2:29:04 PM
I agree that these are two viable strategies. But there is a gradient of possibilities of involvement that can be taken by the VCs. This can go all the way from a hands off approach as you suggest to actually running the company and being its management. I would argue that for most companies to truly benefit from VC financing, the VC needs to maintain some distance from the company or else they risk being sucked into believing the story and lose their objectiveness which is required when things aren't going so well and the company needs to be refocused (or abandoned).
Darren
Posted by: Darren Fast | Feb 8, 2006 3:58:13 PM
It would strike me that Spray and Pray is the investment methodology of choice for a VC with more money than sense, or who is, like a craps player, trying to cover as many points as possible while a good thrower holds the dice.
VCs I've worked with - and respected deeply - always brought some special perspective on how to success to the table above and beyond their checkbook.
Posted by: Bob Corrigan | Feb 8, 2006 6:36:53 PM
Fred,
Can you give us (ok, me) a little more insight into what active involvement means in terms of a time commitment?
Also, what's your take on how this works for earlier-stage investments - does the nature of angel investing make one strategy better than the other when you're investing primarily in ideas/people?
Posted by: Ken King | King Marketing | Feb 9, 2006 8:38:08 AM
I believe this is an old infantry term (maybe WW2 or Korea) that came from the days of automatic rifles. Sorta the opposite of the VC meaning... ;-)
Posted by: Bob Devine | Feb 9, 2006 3:03:30 PM
I like the Israeli variant I heard from VErtex: "Fire and Forget"
Posted by: Fred D | Feb 9, 2006 4:11:58 PM
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