Posts tagged with ‘venture capital’
One of the simplest arguments against consensus-based decision-making: it leads to suboptimal results over time. Here, Katrina Booker looks into Greylock partners make their bets.
Katrina Booker, How Greylock Partners Finds the Next Facebook
Heighten the Conflict
“There is a lot of mythology about how firms decide,” says Sze one recent afternoon at his Sand Hill Road offices. The space is, for the most part, nondescript—tidy rooms and cubicles above a New Republic bank branch. There is something unusual installed on one wall: the shape of a slender tree painted black, branches blossoming outward. At the end of each branch is a small wall mount holding every cellphone and mobile device Sze has owned—from a brick-sized US West to the Apple Newton to the iPhone. It is a physical reminder of how quickly technology has transformed just about every part of our world over these past 20 years. For much of that time, Sze has been deep inside this revolution, finding the companies that are driving it.
“A lot of these voting systems are consensus oriented, where you need to have 100 percent unification of the group,” observes Sze. Greylock’s system is different. A few years ago, the partners analyzed their pitch meetings, looking at ones that had led to their best deals and their worst. The deals fell into three categories: ones everyone hated, ones everyone loved and ones they fought over. It was this last group that yielded Greylock’s biggest wins. Facebook, Pandora, Airbnb were all hotly contested pitches. On Airbnb, Sze clashed with Hoffman, certain the idea would never work. Luckily for Greylock, Hoffman doesn’t back down easily. “We are looking for outliers and extremes,” explains Sze. “So we try to heighten this conflict.”
All companies today have to operate like VCs: they are making bets on dozens of innovations in their own business — ideas for product enhancements, customer support changes, new ways to get things done, technologies to buy and roll out — and just as in the world of venture capital, things are moving too fast for all to come to agreement. And no one is smart enough to be the sole decision maker, either.
As Reid Hoffman of Greylock says
When the idea is big enough and edgy enough—it’s either madness or genius. What you are trying to figure out is which one it is.
And companies need to have a system to move forward — to experiment on big, hairy, dangerous ideas — even in the face of dissent about whether the idea is crazy or genius.
Venture capital firms are closing, decreasing the size of funds, or dropping partners, as a result of a worsening marketplace for start-ups to get to liquidity. As a result, the VC firms are finding it harder to raise money to invest:
Pui-Wing Tam, Venture Firms Take a New Tack
U.S. venture-capital funds garnered $20.3 billion in 2012, essentially flat from 2011 and down from $39 billion in 2007, according to Dow Jones LP Source.
Overall, there were 842 venture-capital firms in the U.S. in 2011 that raised money in the previous eight years, down 16% from 1,004 in 2007, according to the National Venture Capital Association.
More venture firms “realize that in order to be successful and deliver returns, they need to be focused on smaller groups of people and smaller sets of companies,” said David Hornik, a venture capitalist at August Capital, which in October closed a $300 million fund, compared with $350 million for its previous fund. Six partners are investing out of the new fund, down from seven for the prior fund, he added.
Many venture firms are responding to a higher bar from investors, who have been disenchanted with scant venture returns and are scrutinizing partnerships closely to pick out the stronger versus weaker venture capitalists in a firm.
Investors “have become more selective because their return requirements are higher.” said Tom Gladden, a partner at investment management firm Adams Street Partners, which invests in venture funds. “We’re going to evaluate the [venture firm’s] team to the point of looking at the personal franchises of individual partners.”
What is unsaid in this story is that investors the world over are finding it harder to determine where to invest. Uncertainty and ambiguity make it difficult to pick sectors or investment vehicles — like start-ups — with anything like a dependable return.
Michael Arrington announced recently that he’s starting a VC fund, so AOL has announced that he will be ‘replaced’, presumably to distance him from writing about his investments.But he will continue writing there. Presumably not about the companies he’s invested in? Very blurry. Especially blurry because apparently AOL is the biggest investor in the fund, according to Dan Primack. Huh?
But I thought Arrington was only the founder of Techcrunch these days, and that he had handed over CEO control years ago to Heather Harte? His profile at Crunchbase does not mention editorial duties, but the Techcrunch profile lists him as co-editor with Erick Schonfeld.
In a move that will likely damn him, I think that Erick Schonfeld is a great editor and writer. I can’t imagine why they wouldn’t offer him the editorship, but apparently Arianna doesn’t want to:
Nicholas Carlson via Business Insider
Eric Schoenfeld will takeover Arrington’s management duties in the interim.
We thought that Arrington hasn’t really been the managing editor TechCrunch for a long time now – that such a role belonged to Schoenfeld already.
Shouldn’t Arrington just start a personal blog like every other VC? Whatever.
Perhaps Schonfeld is looking around for a different gig, though, considering how badly AOL’s transition into a media company is doing.
- The AOL’s deal with Michael Arrington, TechCrunch: he’ll still write or nothing else (nextlevelofnews.com)
- ArringtonGate, Goldman Sachs and ‘Relative Conflict’ (howardlindzon.com)
- Silicon Alley Insider: NO CONFLICT, NO INTEREST: AOL Startup Journo Michael Arrington Is Raising A VC Fund To Invest In…Startups (AOL) (businessinsider.com)
Claire Cain Miller seems to hold up color.com as a cautionary tale. Is the market getting bubblicious? Looks like it in Cali. I think NYC is more prudent.
Tom Evslin has an interesting post about his recent experience at Wikipedia, where he had created an entry on Advisory Capital (yes, the term I coined a month or so ago) that was “speedily deleted” because of anti-blog bias:
[from Wikipedians vs. Bloggers]
But Wikipedia is somewhat schizophrenic when it comes to blogs.
I realized this shortly after I created a Wikipedia article on advisory capital (a term Stowe Boyd introduced and many blogs are discussing) when the article suddenly disappeared. “WTF?” I asked myself.
Turns out that it was “speedy deleted” by a Wikipedia editor (there is such a thing – something like a sysop on a message board used to be). The reason given was “lack of context” which basically means the topic was made up out of the blue. The deleted article list pointed to the deleted article policy which told me how to appeal a deletion. I did.
Tom goes into the back-and-forth of his descent into the seven circles of wikipedia, and concludes:
The example of “advisory capital” is a trivial one but a good illustration. Within a few months use of the term “advisory capital” will either have died out or been picked up by the traditional media. According to some interpretations of Wikipedia policy, the article will become appropriate once the term appears on a dead tree. The irony is, of course, the traditional media will have picked the term up from the blog discussion which Stowe Boyd started.
Obviously blogs are authoritative and verifiable as a source for what is being discussed on blogs – the claim I’m making for advisory capital. But it is an oxymoron for Wikipedia to disdain self-published information on any subject. Sure, most individual bloggers (including me) have earned little public credibility. Individual contributors to Wikipedia don’t have individual credibility either. But the aggregate of the information and opinions presented on blogs or Wikipedia articles is an extremely useful source. There isn’t much difference between bloggers and Wikipedians.
One of the many strengths of Wikipedia is that everything including policy is open to discussion (altho Wikipedia disclaims being a democracy). Searching for my missing article and the reasons for its demise, I joined the WikiProject on Blogging to better integrate Wikipedia and blogs. You can join or lurk as well if you’re interested.
The discussion on whether or not to delete the advisory capital article is here. Not sure how that’ll come out (only one vote to keep so far) but I’m more concerned with the overall issue of blogs as one of many useful types of source than with this particular article.
I in particular liked Tom’s recommendation to the Blog Wikipedia project to counter the bias against blogs and level the playing field with other media:
I have added a proposal to the blog wikiproject that an acceptable measure of current notability be the appearance of an article subject with a high technorati rank (or other measures of blog attention). Note that this does not make blogs an authority except on the subject of what’s being discussed - and does avoid narrow or vanity articles.—Tevslin 20:06, 22 March 2006 (UTC)
The whole thing is surreal, for me, since I am in the early stages of planning a one day summit on the topic of Advisory Capital (about which more later), and have been talking about the concept with dozens of people. This flap at Wikipedia makes for a strange backdrop to that.
There has been a great deal of discussion in the tech community about the changing needs of Web 2.0 tech startups. When the underyling economics of innovation have shifted so drastically — cheaper high-powered servers, open source LAMP stack, accelerated development tools and techniques (AJAX, Ruby, Php, etc.) — more and more companies can bootstrap from pocket change, and be up and running in less time than it takes to secure capital. As a result, going the VC route is increasingly seen as a brake on this class of tech innovation, not an accelerator, at least in the very earliest stages.
But the needs of today’s start-ups for quality advice and guidance has not changed, but because the VCs have a harder time getting involved — they aren’t geared to make <$50,000 investments, generally — small start-ups are left with a variety of options to fill the advisory gap since they don’t have VCs advising them:
- Go without advice from outsiders — seems to happen a lot, but can lead to big goofs.
- Go with advice from an extended network of informal advisors — friends, family, and others well-known to budding entrepreneurs may have their interests at heart, but may not understand the market that their innovations will be playing in.
- Look for knowledgeable angel investors — those well-off individuals who are geared toward making smaller investments in early stage companies can often be knowledgeable about tech in general, but are not necessarily clued into what is happening in the innovators’ space.
- Seek the advice of leading authorities in the market that the product will be competing — and often, this translates to the leading bloggers, consultants, and authorities writing about the market in question.
It is this last option that I have had the most experience with recently, since I have spent most of my time since 1999 blogging about new technologies, particularly those with a dominant social orientation, and in recent months I have spent most of my time as a consultant working with small start-ups.
But the basis of involvement in this shifting territory — the area between the consulting authority, and the advice-hungry innovators and entrepreneurs — has to be rejiggered to better account for the needs of both parties. Pure play consulting may not be workable any longer, because the potential value of the involvement of a specific consultant cannot be accurately determined at the start of an engagement. A consultant is unlikely to want to part with a strategic concept that could make a client into a $100M player, potentially, in exchange for a per diem and the possibility of some downstream consulting, maybe, if you’re lucky. And the best results may not come from a few days of consulting, but a long-term strategic involvement, like venture capitalists typically make in their portfolio companies, the expense of which small companies have historically been unwilling to take on.
What I think is needed is a fusion of the best of both the venture capital and advisory board models. I call this Advisory Capital:
- Like venture capital, advisory capital is about the investment of a critical resource into a startup. It’s not money, however, but the experience, expertise, social capital, and public authority that advisory capitalists invest.
- The leverage from advisory capital comes from consistent involvement over strategic scope of time: months and years of frequent interaction. Weekly calls, monthly meetings, quarterly planning sessions. A constant focus on bringing strategic goals into realization.
- Advisory boards in principle are a way to involve well-known authorities or business celebrities into the mix of the business, but in practice they have become a PR exercise with flabby results, in general. The minimal levels of involvement — an occasional call, an annual dinner — do not lead to great results, because there is not a deep enough investment being made.
- I believe that someone who will be an effective advisory capitalist will view that role as their primary professional purpose. Just like the best venture capitalists are not doing something else on the side, those moving into this new frontier will not be part-timing it.
- In order for the AC model to work, other elements of the VC model have to fall into place. The AC has to avoid conflict of interest — if she is affiliated with one company building a product to do X, she cannot do the same with a second company. But this also means that the return on involvement (ROI) for the AC has be be more like a VC than a consultant. For a strategic level of involvement there must be a non-trivial return on involvement.
- The historical levels of stock participation for the passive, PRish, list-of-names sort of advisory board membership are inadequate for the degree of involvement contemplated. ACs will have to prove their worth, but my feeling is they will prove to be something on the order of 10 times more effective that the Madame Tussaud wax dummies that most companies populate their advisory boards with. And a company will only need a handful of ACs, rather than a boatload of in-name-only advisory board members.
- Advisory board stock participation is often as much as 0.25% to 0.5% ownership in a startup, subject to normal vesting periods of 4 or 5 years. I believe we will see this boosted 5X, 10X, or more, to attract and retain powerful ACs.
- Unlike VCs, ACs are not amassing cash from passive investors, and managing it for them. ACs do not have a pool of cash to draw a salary from. (Or at least many of us don’t.) As a result, they will seem like a consultant on some level, since they will charge for their time and expenses. However, at least in my case, I am discounting from my a la carte, short-term consulting rates when moving into an advisory capital situation: when the client is interested in a long-term, high involvement relationship, involving a serious stock share (1% ownership or more).
So, along with coming up with a term to put on the business cards that I have yet to order, I believe that the concept of advisory capital may clarify some of the issues swirling around about the potential conflicts that confront leading authorities — especially prominent bloggers and others in the public eye — relative to their making public comments about companies that they are affiliated with:
- Simply by stating that I am an advisory capitalist — and not a journalist, hobbyist, analyst, nor a consultant, per se — I am making clear what I am up to. I am seeking to invest my time and energy into a portfolio of potentially successful startups in return for the appropriate ROI (return on involvement), plus a living wage. By analogy with venture capital, people will be able to bend their heads around advisory capital.
- Those that announce that they are, in fact, advisory capitalists can subscribe to the (as yet unformulated) Advisory Capital Code Of Ethics. These will likely be heavy on disclosure, openness, and transparency.
This also suggests another thing for venture capital firms to do: rather than trying to focus on how to reorganize to invest smaller and smaller sums into more and more companies — and thereby diluting their involvement — they need to jump from investing cash to investing advice. This would allow them to vet dozens of very early stage companies, and cherry pick the most likely contenders for future success, even if they didn’t need cash at all yet.
Alternatively, as some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out. Or potentially, I could take on investment for my company, A Working Model, in effect making my advisory capital investment fungible. I could wind up backing into a situation where the primary asset of A Working Model is the stake it holds in its various advisory portfolio companies. So, the world of advisory and venture capital may start to overlap, and blur, becoming two halves of the sphere of involvement that drives high tech innovation.