Should venture capital scale?
My friend Dave McClure’s thoughtful and provocative post on the scaling of venture capital made me think. It definitely rubbed me the wrong way and I think I know why - because I don’t take it as a given that venture firms, by definition, should scale, whereas the premise of his post seems to be that we as an industry are failing by not doing what we are telling (and hopefully helping) our companies to do. I think this grossly simplifies what “venture capital” means and holds it to a false standard that isn’t helpful to building big, disruptive, awesome companies.
Entrepreneurs are the customers of the venture investor. A big difference between the VCs customers and those of, say, Dropbox, is that there is far greater heterogeneity among the VCs customers. While there are myriad use cases for Dropbox, the scope of product that satisfies those use cases is well-bounded. Not so among the VCs customers. The range of variability arising from different personalities, experience levels, competitive landscape, skills sets and team chemistry creates a need for what I’d classify as a “customized” product. It is more akin to a custom-made suit than a pair of athletic socks. It is not a game of portfolio diversification: it is a craft, with each company as its own discrete project warranting that level of attention, guidance and support. This, of course, presupposes that the venture investor actually adds value, versus the view that money is fungible and investors are undifferentiated.
I can’t speak for the entire industry but I can certainly speak to a sizable group of venture investors I know who definitely have a material positive impact upon the performance of their companies, and I certainly hope IA Ventures falls into this bucket as well. Because if money is really all that matters, then why is there a perceived hierarchy in the industry at all? Why should one firm’s historical performance or star partners give them an edge over anyone else? Answer: because it does matter. Great investors make a company more valuable by helping the team think strategically, recruit, react, problem solve, make difficult decisions and handle hard times. And it is this value that can sometimes lead a company to choose a lower offer from one partner they think can make the enterprise much more valuable than another. It actually can be rational to take the lower offer in the short term for a far greater payoff in the long term.
Investors like Dave play a hugely valuable role in the startup ecosystem and help lay the foundation for others who manage smaller, more focused portfolios and are able to invest a lot more capital and to spend a lot more time on a particular company. I do not believe the industry would be best served by all firms looking like 500 Startups. Venture investing is its own “attention economy.” There simply isn’t a way that a great partner’s attention can scale beyond a certain point, and then the question is whether or not providing a lot of attention to a smaller number of companies into whom one has invested larger dollars makes sense. I personally think it does and have built my business around this premise.
I believe firms like IA Ventures play a vital role in the company building process, just a different role than investors like 500 Startups. And I can assure you, we don’t scale well. I actually think scaling in venture capital has rapidly diminishing returns beyond a small number of investing professionals, when the weight of organization begins to place a tax on attention beyond what is spent working with companies and getting valuable input from one’s partners. This is why I respect firms like USV and Foundry who have a commitment to remaining small and working closely with their portfolio companies.
In sum, I applaud Dave and the transformational effect he has had on the seed stage investing scene. I think start-ups could definitely benefit from more firms like 500 Startups. However, I think it is a valuable but insufficient component of a robust venture capital industry. I fundamentally believe concentrated attention can be value accretive, but that this type of engagement doesn’t scale. So what - why does it have to?
