My Thoughts on the Venture Capital Industry

Jul 21

In: Technology and VC

One of our investors is updating his POV on the VC environment and reached out for my 2 cents. After thinking about it, I would describe my observations of VC with this headline: “steady as she goes.” Here’s why.

Intra-firm dynamics have stabilized. I think the firms that needed to restructure pretty much have, as I’m not hearing much new anxiety from peers. In some situations, firms have shut down offices and exited certain vertical sectors. In some cases, senior partners were pushed out, and in other cases, they decided to turn over the reigns to the next generation.

I’ve blogged in the past here about how a legal entity called a “management company,” which is separate from a firm’s fund and partnership structures, really controls a VC firm. A handful of individuals tends to dominate a management company and the ensuing economics of a firm.

Restructuring has usually meant that other individuals have been phased into a management company. And, senior partners have negotiated a “tail” of fees in exchange for letting others into the management company.

The roles for various funding players are now well-known. I think entrepreneurs have become very informed. They know the pros and cons between a micro-VC (invest in one round only)  and a life-cycle VC (who invests in every round), between a new VC brand and an established one, between a convertible note and a priced equity round, between working with an Associate vs. a Partner vs. a Management Company member, etc. They also seem to know which VC firms have fresh money, which ones have just a few shots on goal left, and which ones are tapped out.

So, entrepreneurs know to whom they should go for a seed round vs. a Series A vs. a later-stage round. For seed and Series A rounds, which is the entry point 95%+ of the time for Kepha, I’m finding that it has become a very streamlined set of players. For seed rounds, we usually see some micro-VCs, angels, ourselves and two other Boston-based firms.

For Series A rounds, it is also a focused group. I’ve blogged in the past (click here) that, IMO, there are only 15 individual partners based in Boston who have the capital to price Series A Internet/software/tech rounds. It is even tighter when you break that group down by sector, as some focus mostly on B2B whilst others do B2C mostly. So, this group of 15 is seeing very good in-bound flow right now.

In addition, I’m not seeing many new VC firms entering the market. I get the sense from LPs that they’ve already picked which established firms and which new entrants they want to back. So, it is a stable group of players right now.

It is a two-tiered market. I’m seeing fewer financings get done, but that firms are willing to “pay up” for quality, even in the seed and Series A rounds. National data from Pitchbook seems to imply the same (their recent report is here). I’ve seen this at other times in the cycle when there’s a “flight to quality,” which means entrepreneurs in the perceived top tier are getting great terms and everyone else is struggling to raise money.

It certainly isn’t fair, as perception of quality early on is nebulous at best, but that’s the market reality. And, I don’t see this trend changing much unless there’s another global crisis or the IPO window becomes more robust.

So, what does all mean for VCs?

I cannot speak for the industry, but Eric, Ed and I talk about it a lot. And, this what we think for our firm: investment “alpha” has shifted to management.

Alpha is what all investors seek. You can get higher returns by taking on more risk, but alpha denotes a manager’s ability to generate returns in excess of a given level of risk. When I entered the VC business in 1998, for example, sourcing seemed to be a big source of alpha. VCs were hard to track down, and you either wrote letters to them or received a referral to them via a portfolio company. Inbound flow therefore could be somewhat proprietary.

Social media and blogging have completely changed all that. I think entrepreneurs can pretty much get to any VC they want. I don’t think there’s alpha there for the VC as a result.

In fact, in the “VC value chain” of sourcing, picking, winning and managing opportunities, I think alpha is in the managing part. I think it’s fairly easy to source and pick the investments you want. It will always take skill to beat out other VC firms, but when everything is pretty much auctioned, spreads in returns will come largely from managing an investment.

My partner Eric calls this “company building,” and there’s a myriad of difficult decisions board members face when progress is slow for a start-up. Some start-ups catch lightning right away, but the vast majority need to adjust/pivot/retrench, and this is where business judgment for the VC really needs to come and play.

Sometimes, your co-investor gives up and you have to decide whether to keep funding the company alone. Sometimes, the market for that start-up is really slow, and you need to decide how much patience you’re willing to show. Sometimes, a co-founder leaves, and you have to wonder why. Sometimes, a founder has a glaring weakness about which he/she is unaware, and it’s your job as the VC to be a coach without alienating that person.

I could go on.


So, those are my 2 cents. After a great deal of change and tumult, this now feels like a period of stability for the VC industry. Things of course could be better, but they can certainly be a lot worse. IMO, portfolio returns will come not from sourcing/picking/winning, but from helping entrepreneurs succeed.

Steady as she goes.

‘At Peleliu and Okinawa’

Jul 20

In: Books, Brain hacking, Movies / TV

I just finished reading Eugene Sledge’s book, With The Old Breed: At Peleliu and Okinawa

It is an unvarnished account of his time in the Marine Corps during WWII, fighting some of the gritiest battles in the campaign against Japan. It’s a very courageously-written book about what life was like as an infantryman and the dangers, suffering and brutality that soldiers on both sides faced.

I decided to read it after streaming the HBO mini-series, from Tom Hanks and Steven Spielberg, called The Pacific (trailer up top or here). I had thought it was fiction, only to find in the last segment that it was all real. Sledge’s book was source material for that series. So, I bought the book on my Kindle.

I found it interesting that Sledge’s book was initially a private document meant to be shared with family. His wife encouraged him to write down his experiences, thinking it would help him psychologically heal from the war’s effects.

It reminded me of NY Times article on PTSD. A new treatment has combat veterans write down their most traumatic memories and then discuss them in small-group sessions. Then, those memories are re-enacted. The hope is that closure can happen.

I’ve written in the past that the right brain is a parallel-processing engine. It can recall past memories all at once, and when those sudden images are not integrated with the left brain, those memories can feel as though they’re happening now. People who suffer from PTSD relive their trauma over and over again. The brain is awash in an endless bath of stress hormones.

A key part of PTSD treatment is to integrate the right and left brains. Basically, you want the left brain to tell the right brain that those images are from the past: “that’s all over, that’s from the past, and you’re safe right now.” And, you do that by writing, talking and re-enacting those memories.

Next time you meet a veteran who has been in combat, mention the NY Times article. And, thank him/her. Chances are, those soldiers are still paying a high price for our freedom.

People who have been in combat say that there’s no glory in war. Sledge’s book makes that absolutely clear.

Fighting Cancer

Jul 17

In: Personal, Philosophy

My mother died from cancer, as did my friend, Mike Connell. Thankfully, I know many others who have gone through treatment and are doing well.

One of our closest friends is in remission. While she went through chemotherapy, I ran into her husband at the grocery store. “Fighting cancer is a marathon,” he said. “It is a long journey, not a sprint.”

I’m reminded of those words as I see this video of Stuart Scott, the ESPN sportscaster, who is undergoing treatment and yesterday received an award at the ESPYs. Link is up top or click here.

He talks about what it takes to battle cancer. It is very moving and very much worth watching.

Hang in there, Stuart, and my thoughts and prayers for you!

What Will Be Your Retirement Speech?

Jul 13

In: Career management

I’ve met Steve Ward (photo up top) a few times, and I’ve heard students rave about him. They say he is an amazing teacher. He recently retired from The Roxbury Latin School and gave an amazing speech.

What would you say at your retirement speech? How can you capture what you’ve experienced in a short talk?

Well, his speech is a great example of some very thoughtful and funny reflections after 40 years at the same school. The last few paragraphs are particularly poignant. I couldn’t find his speech online, and so, I’ve scanned it, and it’s available here. Hope you enjoy it.

They say teaching is a noble profession. I’d have to agree with that after reading the speech. It has been a well-lived life for Mr. Ward.

A Moment in Time

Jul 13

In: Brain hacking, Family life, Personal

Chapel at Le Château Du Brueil

(by E.R. Tango)

We fortunately had a very smooth flight back home. We are glad to be back at our house, but are feeling a bit subdued, as we miss our Backroads guides and the other families with whom we grew very close while biking in France.

But, that is the price of friendship, I told my children. It is fun to be together, and it can be difficult to part ways. It is OK to “name it” and say that you’re sad to be apart from new friends. It would be worse to deny/suppress those feelings.

For me, I prefer to think of it as “until we meet again” as opposed to “goodbye.” I think it would really suck if I never saw those people again, frankly. But, this is where technology becomes handy.

Our group is now starting a shared Dropbox folder, with which to share photos. A number have been uploaded already, and they really do make me smile. It is said that a picture says a thousand words, and I find that to be so true. You see an image from a wonderful prior time, and your brain recalls that moment and the emotions wrapped up with it.

I find the brain fascinating in that way. We process our environment serially with our left brains, but in parallel fashion with our right brains. The left brain can store items and see them as “in the past,” whilst the right brain can recall images and have them seem as though they were “in the present.” It’s why seeing a photo can bring back a wonderful rush. Photos can trigger memories which then in turn recall emotional states. Our right brains let us do that.

Photos are really powerful. I can recall some early-childhood memories because an old photo anchors them. I think that is why it’s important for parents to take photos of their children. Those photos will help their children recall those moments.

I’ll end this post be referring to the painting up top. It’s an amazing watercolor my wife painted. She really captures the chapel at Château du Breuil, where we first stayed on the biking trip.

But, she does more than that. She captures not just a place, but a vibe and particular state of mind. It was the beginning of our trip, and everyone was eager to start cycling. We were in awe of the beauty of the château. Our group was just getting to know each other. Everything seemed fresh, energetic and exciting.

With that painting, she captures a very precious moment in time.