It’s a little in vogue these days for seed stage investors to bash on larger VC’s. It’s kind of fun, and in many cases, the criticisms have merit.
But most folks agree that having home run potential almost always means raising VC money to the tune of tens of millions of dollars. Large VC’s fill this capital need, and also can add a lot of value through the lifecycle of the company. Also, some of these partners and firms have been in the investing game for a long time and have had success in different economic cycles, so there is a lot to learn from them.
Here are a couple practices I admire. Full disclosure, I’ve worked at one VC firm (Spark Capital) and haven’t seen the inner workers of any of the others, so these thoughts come from my own external observations.
Bessemer’s Road Mapping Discipline
David Cowan described the road mapping process for Bessemer in an old blog post. Talking about being thesis driven is easy, actually doing it is a lot of work. It’s one thing to be interested in general themes and navigate towards “heat” in the market. Many many investors do this and claim to be “thesis driven”. But that’s not accurate, and that’s not what road mapping is. It’s actually doing real work to develop an independent point of view on where markets are going and what technological innovations will help make this happen.
I think this leads to very smart investing, but also is a huge benefit to the entrepreneur. It’s great to know that your investor has a lot of depth in your area to offer, and it also helps smooth out the fundraising process when a partner has already pre-sold their roadmap internally and can quickly say “no” when it’s clearly not a fit.
As a side note, I think this is why Bessemer has had such a great track record of developing and training very thoughtful entrepreneurs and investors over the years (for example: Chris Dixon, Larry Cheng, Waikit Lau, etc).
Spark’s Tenacity and Conviction
I debated whether to include something from Spark since I’m biased. When I was interviewing with Todd and Santo, one of the attributes they really focused on was my level of tenacity and conviction (I ultimately told them the story about winning over my wife after many years, but that’s a different tale altogether).
The venture business is very competitive and it’s challenging for new entrants to compete against heritage firms that have been around for many years. But in 5 years, Spark has emerged as a very strong player across the country. This comes from deep conviction that there is no reason why they can not gain access to the best investments (regardless of location) and the tenacity to prove to entrepreneurs that they would be the best partners for the long haul. I’ve heard other East Coast investors say “I’m not going to pursue that west coast deal… I don’t think I have a realistic chance to win it”. But I never once heard anything like that at Spark.
What’s particularly impressive is the firm’s deep activity in NYC. Long before it was in vogue for Boston VC’s to hop on the Acela, Spark was already pounding the pavement and building a strong reputation in New York. Over the past four years, Spark has been one of the two or three most active investors in the city with over 15 portfolio companies. It’s difficult to have the tenacity and conviction to lead, but that’s the only way to separate yourself from the pack.
Accel’s Barbell Strategy
Quite a few firms talk about employing a “barbell strategy” where the firm focuses on very early stage investments as well as participating in later rounds of high-fliers. The skill set for identifying and evaluating these investments is pretty different, so I think firms tend to be a little better focusing on one end of the spectrum or the other.
But I think elite early stage firms do have an unfair advantage compared to later stage investors in winning great late stage deals. Often, these firms have stronger brands and a stronger networks of portfolio companies and entrepreneurs to draw from. Making late stage investments can be very lucrative in a world of discontinuous returns. Greylocks’ investment in Facebook seemed crazy to many at the time, as did Benchmark’s Twitter investment (although both will probably work out quite nicely for each firm).
But the firm that has been in the news the most recently at this stage is Accel. Of course, there was Groupon at $250M (they went from crazy to genius pretty quickly). But more recently, there was Altassian and Squarespace. But Accel is obviously a very strong early stage investor as well (Cloudera, Facebook, Playfish, etc) Very impressive.
Of course, there are many other firms I admire but this post is already starting to look like an overly long love-fest. Would love to hear other people’s thoughts on admirable VC practices in the comments!