The Flipside of Venture Capital.

[This post appeared first as a comment on Blue Dot Partners’ blog, Perspectives. Philippe Bouissou wrote a post that resonated with me about The Two Types of Businesses

There are two very different types of businesses. The motivations that drive entrepreneurs behind them are quite orthogonal. Both types of businesses are critical to creating a vibrant economy and while the spotlight tends to be on unicorns and fast-growing VC-backed companies raising hundreds of millions of dollars, small mom-and-pop businesses will continue to be the foundation of a healthy economy.

I am reading a lot of Wendell Berry right now, especially his earlier essays. it’s time that we re-discover some of these thoughts and apply them to our so-called ‘modern times’.]

Wendell Berry talked about that you can look at life either linear or circular.

  • Linear: growth and progress at all costs, ends justify the means, every outcome has to drive the ball forward and has to be immediately useful.
  • Circular: Everything is important and has the right to be and make happy, there is a certain mysticism about life where we cannot always explain the effects of seemingly small things, that the past is also the future, that death is part of life. We intuitively know the value and truism of “circular”: karma is a bitch, what comes around goes around, the butterfly effect, you always meet people twice, etc.

It saddens me when some entrepreneurs do not realize the forces at play with venture capital. When they should have taken out a bank loan and created a lifestyle business. When they are undoubtedly great human beings, who enjoy and love to build a tribe but not a nation. They want to serve customers at a quality standard that requires craftsmanship and personal care. There is a reason why most of VCs rarely like large professional services organizations in their startups at scale: It is something that can happen after the VC’s liquidity event but is otherwise mostly incompatible with the required growth KPIs and measurements of the financial transactions involved.

I am a big fan of working very hard to give Limited Partners of a venture capital fund — the money behind the money — the best possible outcome for the money they entrusted with me. But there are things I will not do. I am appalled by the cut-throat, scheming, and flimflam attitude in many areas of my industry, so much that I wonder if I can ever make a dent. I enjoy financial success as much as anyone else. It allows me to further personal projects that are dear to my heart, like public land preservation or affordable housing.

Like any industry where massive amounts of money are involved, it also attracts a particular type of people who embrace capitalism as if it is a religion of growth and greed. Where success is measured in $$ redirected towards their firms — and primarily towards them. They want a great workplace not because it should be inspiring and fulfilling to come to work but to attract better talent than their competitors and grow faster than their industry peers. Culture third. They want to enter more geographies, not because it makes sense, but because they are worried that their competitors enter these regions first.

It puzzles me how business schools and consulting giants talk about resilient organizations while some CEOs and VCs want meteoritic growth — forgetting that meteors usually flare up in the atmosphere or travel for millions of years in empty space. Talk about lack of product-market-fit. It is true that when we think about venture capital as a high-risk venturing asset class, then high-risk early-stage VC portfolios are driven by outliers and meaningful exits (returning at least 1/3rd of the fund) and not by losses because of portfolio effects. We need to return money to our LPs over five to ten years, with a risk-adjusted chance of outperforming other asset classes (that’s why the LPs gave us their money in the first place).

As a human being — not only as a VC — I have a choice. I could be driving that return no matter what. I could encourage my companies to faster growth and absurd spending (“… other companies in my portfolio perform better right now, and you know at some point I have to decide where to concentrate follow-on investments …”). I could fuel the founders’ fear of missing out because one of their competitors — or one of their friends — supposedly just raised $60M in a week. I could drive my companies to become public companies at any cost for a liquidity event, hoping they survive the 180-day stand-off period. I can push valuations to new heights with corporate venture capital arms (“… of course there’s risk involved, and you have to do your due diligence yourself, but we believe this could be a rocket ship …”). I can pledge my support and believe in the break-out performance, raise a large round from strategics or private equity, and then use that momentum to push a sale a few quarters later (“… $500M, isn’t that great?! Oh, it’s only a 1x outcome for you? Well, it is the best for the company, I’m sure you’ll agree, and a great outcome for the founders. Yes, I did make a 20x on that, but you know how these things work …“). I can start selling shares on the secondary market at absurd amounts of money in absurdly high-valued startups (“… hey, I’m just selling, if they’re willing to pay that price … they have to do their own due diligence …”).

Or, I can acknowledge the returns expectations and moral standards and integrity necessary to raise a second and third fund afterward. I can create an environment at my firm and at the enterprise where we can capture the opportunities of liquidity events after five to 13 (!) years. I can also choose to invest in things that change the world in more than an angry-bird-way (though I like gaming, it can make people happy, too. I’m glad that someone is already doing it. I don’t need to do it, also). I can work with founders who are motivated by their vision and show an attitude of care for nature and humankind alike, not only “their people.” If we can put great human beings into a leadership position where they can influence thousands of employees and their families, and touch maybe billions, if they can inspire and be a role model, I think there is something good that comes out of it.

Thoughts? Opinions? Comments? Corrections?