I think that is a tall order. I will give it a shot, though, using two perspectives as a starting point.
First, I started in VC in 1998 and saw the Web 1.0 Bubble and Crash, as well as the time since, which I personally call “The Lost Decade of VC Returns.” As the Kaufmann study states, VC returns have been very poor. An industry that once steadily produced extremely high investment returns has changed.
Second, I write with personal knowledge of what VC 2.0 firms are trying to do. Back in 2007, a small group of founding partners at new VC firms started to meet at an off-site. We all had been in VC for a while and all had the entrepreneurial itch to start our own firms, and were lucky enough to get funded. All of those individual VCs are known in the industry, and some of the new firms are now household names.
We gathered every year for a private discussion (which is why I won’t reveal the names), both to brainstorm about VC and to give each other support. You see, we all had left the security of large firms and stepped into the dark unknown as entrepreneurs. I recall those early meetings with great fondness and gratitude. It was a special time. We had a “we against the world” mentality.
So, with that long prologue, let me write about what I see in common among this VC 2.0 crowd:
- We love what we do. Many in the group can easily retire, as they’re already financially secure. But, every founding partner was clearly passionate about entrepreneurs and start-ups. Our new firms weren’t just about a job or doing something different. We really love working with start-ups. And, that’s what we wanted to do with the majority of our awake time. It wasn’t about money.
- We are contrarians. It’s hard to believe, but starting a new VC firm was a hugely controversial career decision back then. After all, it was conventional wisdom that a firm’s brand really mattered. Entrepreneurs, it was assumed, really cared about a firm’s prestige due to its signalling abilities. Institutional investors believed that investing in the “top 20 brands” was the best investment strategy. Today, there’s no conventional wisdom on VC. It is instead a time of great innovation. In fact, many entrepreneurs now value a partner’s personal brand much more than a firm brand. After all, they’ll be working closely with a partner. At Kepha, we are lucky to be working with so many entrepreneurs who have options to go elsewhere. Our entrepreneurs have created over $8 billion of shareholder value in their careers. Many don’t need VC money, and if they do, can get it from any firm in the world. We love working with first-time entrepreneurs, too, but we also really like working with people who have had wins and losses in the past and have learned from them.
- We want to innovate in the VC industry. Through luck or instincts, our group really felt there “was a better way” to do VC. My 2 cents was this: how is it possible that the industry that funds innovation is itself immune from innovation? I remember when I was fundraising alone for Kepha’s first fund. So many people thought I had lost my mind. The belief was that the top 20 VC firm brands mattered, and everyone else was suspect. Now, so many VCs are trying to “break away” and raise their own funds. I laud them and encourage them and want to do everything I can to help. Now, so many investors in VC are pursuing a new strategy. For example, we are fortunate to have a particularly thoughtful investor who has done very well by bucking the trend. I’m so happy for them because this year Preqin named them as having the best investment returns this decade in their category. That’s right, during The Lost Decade of VC returns, this group rocked. How did they do it? One key thing they did was they backed new VC firms, focusing primarily on people with extensive VC experience but now “doing their own thing.”
- We don’t think VC is an “asset class.” VC is different, than say, stocks or bonds. If you manage a hedge fund that buys stocks, you can either buy a $1MM position in IBM or a $10MM one. If by doing the latter you can produce great returns, you can raise a much bigger fund. So, that business “scales.” VC is different. I cannot jam more money into a young company just because my fund size dictates. Hiring a lot of people to deploy a bigger fund can create huge internal complexity. When Kepha started, we fortunately were over-subscribed 3x. Raising a larger fund was certainly tempting: there were clear bragging rights and the management fees (more here) can certainly be lucrative. But, we raised only what we said we needed. A larger fund would have meant altering our early-stage strategy, and worst, can create strategy drift. We didn’t want the former and feared the latter.
- We are quirky (hopefully, in a good way). This one is hard to explain. There were so many serious discussions in the VC 2.0 meetings, but so many jokes and laughs. Each person had a very unique personality and tone. The VCs marched to a different drummer. A fun group. I could see why some of the personalities just didn’t feel comfortable at a very large VC firm, or longed to be free of bureaucracy. It might be why many of us click very naturally with start-up founders, as we ourselves are founders.
- We believe the entrepreneur is our customer. Sounds hokey, but this was a firm belief in our group. We felt that the VC industry was not serving well the entrepreneur’s needs, and we wanted to do better. We felt that entrepreneurs are doing really hard stuff, and so, deserved to be supported and treated well. At Kepha, we try to remind ourselves of this. That’s why it’s on our list of Operating Principles (more here).
So, those are my 2 cents on what is “VC 2.0.” Hope it is helpful.
What’s very exciting to me is that innovation in VC is now the law of the land. There are so many different strategies being pursued right now. So many new firms are getting real portfolio traction, and so many of the VC 1.0 firms are re-vamping themselves.
I think all of this creativity is very good for the VC ecosystem. Whether you like the VC industry or not, I think it’s an important source of job creation. If the industry can continue to change, I personally predict a new golden era for venture capital. And, that bodes well for entrepreneurs, jobs and our nation’s health.