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Don't blame the game, blame the playas

Apparently, venture capital is a cruddy asset class where you can't get returns over the long term.

Not only that, but there's a "Series A Crunch" that we've been talking about since October of 2011 where good companies can't seem to get to their next round of funding.

And tech journalists talk about these things as if they're some kind of structural problem or at least a trend with the asset class.

That might make sense, if venture capital was an asset class.  Saying that venture capital is an asset class is like saying that Italians are a race.  Venture capital is just equity--and it's equity that isn't widely available to everyone and it gets invested in by a wide variety of investor types with different strategies.

For something to be an asset class, you need a group of securities that exhibit similar characteristics.  Is there anything similar about two kids raising a 500k angel round with a prototype as compared to AirBNB getting its next $200 million growth round?  Do you think there are some overriding market characteristics that are weighing in equally in the performance of both those investments?

In the public market, when stocks have a bad year, every equity investor pretty much has a bad year.  Managers rely on market returns for most of their performance--and it matters less so whether you are good or bad than it does on whether you were exposed to large cap equities and what large cap equities did.  Managers track the market closely, and if you outperform, you outperform by a few hundred basis points or so.  If you miss, you don't miss that badly.

That's why the hedge fund world is more interesting to people.  Hedge funds largely take market returns out of the equation.  It's a lot more skill based.  Strategies are enacted to take the "market" part of the return out and just leave the "better or worse than the market" part in.  Sure, when shit really hits the fan, like in 2008, and the whole market goes haywire, everyone's going to feel it, but in any kind of normal environment, hedge fund returns should be largely uncorrelated to anything else.  That also means that when hedge funds go wrong, they hit the fan in a big way--because some people just aren't very good at what they do.  Survival of the fittest.

Venture capital works largely the same way.  The swing between good investors and bad investors is HUGE.  I'm talking like 20+ percent a year or more.  If I told you that one managers long term return was 30% and the other's was -10%, you'd ask me if they were even investing in the same type of thing.

The truth is, they're not.  

Venture capital is a deal by deal, manager by manager kind of thing.  Not everyone sees the same dealflow and managers aren't fully invested in the market at all times.  They're invested in a collection of deals.  Sure, fundraising may be easier or harder at certain times, but the best companies don't have trouble raising money and nothing can really help the bad ones.

So if companies can't get their Series A, it's not some terrible tragedy that there are otherwise great opportunities that are being left to die.  Those companies didn't execute as well as they should.  I experienced that myself with my startup in 2008 and 2009.  I didn't get Series A Crunched.  I failed to perform.

How do I know that there aren't great companies lacking investor capital?  Because the pool of investor capital is extremely fluid--more than most would have you think.  In fact, lots of other pools that don't usually do venture capital are predisposed to coming in because... well... where the hell else are you going to get returns these days?  It's not like there's some magic asset class that people are flocking to instead of venture?  The hedge fund industry has matured, and even the best managers are struggling to find more opportunities to put their money to work and still get the same returns.  Real estate isn't what it was.  Emerging markets are also maturing.  

So when opportunities to invest in private tech companies aren't getting filled by existing players, you wind up with people from other asset classes and other pools of capital jumping in.  Family offices start doing directs.  Mutual funds start doing late stage rounds.  My fund, Brooklyn Bridge Ventures, has investors who had previously been mostly invested in oil & gas, real estate, and the public markets--and my investors are diversifying into venture capital.  Many had not been active venture investors before--so as other firms leave, fund, or can't raise money, new ones will always pop up.

Or think about it this way:

If I told you that venture capital investments weren't performing well, would you be more likely to believe that:

A) In a world of more shared knowledge about entrepreneurship and tech than ever before, products that could get launched more cheaply than before, a wider base of skilled engineering talent, more industries like education, healthcare, and hardware ripe for disruption, that there's something structurally wrong with investing in innovation?

or 

B) That the people who are trying to profit off innovation--the entrepreneurs and VCs--for whom there is no criteria to try your hand at it, are generally sucking at it.  

If Cinemagram fails, after gathering $8.5 million from venture investors to hire super smart engineers to create animated GIFs, is that a problem with investing in innovation?  Is anyone going to say "Well, if you can't make money animating GIFs, then this whole changing the world through technology and making money off it thing is effed."

I doubt it.

Yet, I'm sure tech journalists will write about that company as a bellwether as to what's going on in the whole market--and unsophisticated limited partners and newly minted angels will lap it all up, reciting line and verse as to whether the market is hot or not.

Do you know what the one criteria to being a venture capital investor is?

It's not skill, experience, character or insight--and least of all, ability or willingness to actually help companies.  

It's just having money.  

If you have money or connections to other people's money, you too can be a VC or superangel or whatever you want to call it.  With such stringent restrictions and that high of a bar, is it any wonder that lots of ridiculous stuff got funded and isn't making it to the next level?

And when our best engineers and creative talents spend tons of venture capital money to analyze the complex web of social relationships, just to show them discount yoga deals, or use social location data to crowdsource the best artesianal brussel sprout pop up shop, isn't it more of a failure of the individuals behind these companies themselves than there is something inherently wrong with the "asset class" or that there's an industrywide lack of investor interest in VC.

I'll tell you what's wrong with the asset class:

1) Venture investors are far too closed minded, only investing in a narrow slice of the potential problems needed to be solved.  

2) We're not much for continuing education.  How many investors take as many classes as entrepreneurs do these days?  Most investors think that once they raise money, the market has told them that they're good at what they do and they can stop trying to improve?

3) There are too many entrepreneurs still running around more excited about entrepreneurship than they are about going deep and solving a particular problem.  These people are going to get crushed by the enormous complexity of the problems they're trying to solve.

4) There are far too many recently exited entrepreneurs or people with access to money that think angel investing is cool who have no appreciation for portfolio management, investment strategy, or what it takes to scale the running of a venture capital firm.  Their ability to vet entrepreneurs is suspect and they haven't quite figured out how they're going to actually help any of these companies.  Folks, venture investing is extremely hard work.  I feel like those same people who get annoyed when "everyone wants to be an entrepreneur" jump into investing as if anyone can do it.  It's just as hard.  Respect my craft and I'll respect yours.

Venture capital investing is alive and well, my friends.  Creativity, knowhow, and insight, however, feel like they're on life support these days--and that's the fault of the people we work with, not of the investment instrament.  

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