Scaling Venture Capital? We suck. We can do better.

I’m kind of embarrassed to call myself a Venture Capitalist.

In fact, most of us who call ourselves VCs should be too.

Why? Because MOST of us are hypocrites, and have NO idea what we’re doing.

Because we SUCK at EXACTLY the thing we’re supposed to help entrepreneurs do — build BIG, SCALABLE companies.

Because MOST of us aren’t engineers. Because MOST of us aren’t designers. Because MOST of us aren’t internet marketers. Because MOST of us haven’t built a customer support team or run 24x7x365 network operations centers.

And yet… MOST venture capitalists seem to think we know EXACTLY what we’re doing when we tell our founders who ARE engineers, designers, & marketers what to do.

We tell them what they should be doing in order to build BIG, SCALABLE companies that can (hopefully) make us lots of money.  And yet, MOST venture capitalists SUCK at building BIG, SCALABLE venture capital firms… well, at least MOST of us, anyway.

Let me explain.

When i was leaving PayPal in 2004, i started doing some angel investing. i really had no idea what the hell i was doing (that may still be true), but due to the good fortune of working at PayPal for a few years, i had a little bit of money in my pockets. and since i knew even less about real estate than i did about startups, rather than blow it all on a big mortgage ahead of the housing crisis, i ended up investing ~$300K over the next four years in a baker’s dozen of young companies. about 5 years later, i got my first meaningful exit when Mint.com was acquired by Intuit, and i made ~10x on a $25K investment. i made a few other investments that seem to be doing well (SlideShare, Mashery, KissMetrics, etc), and i was an advisor for a few companies that also got acquired (Bix, Jambool) where i made some money on advisor stock options.  overall, i was probably more lucky than good, but regardless it seems i didn’t lose my shirt playing amateur investor while i figured out what it is that investors do.

maybe i’m better off lucky than good — i’m still not sure i’ve learned much in the past 3-4 years of “professional” investing at 500 Startups & Founders Fund, or in my previous 4-5 years of UNprofessional investing (arguably, all of my investing could be described that way, and in fact has been by some folks in the past). but good or bad, we’ve made investments in over 250 companies in the last 24 months, and maybe 10-20% of them will survive to adulthood.

but one thing i’ve learned in the past 20+ years i’ve spent in Silicon Valley as an engineer, entrepreneur, marketer, and investor — building BIG, SCALABLE companies is hard. and, it doesn’t happen very often.

i’ve failed miserably several times trying to do it myself as a founder; been fortunate enough to be along for the ride as Max & Peter & others at PayPal successfully beat the odds to build a pretty darn big company that went public and later got acquired by even bigger eBay. and i consider myself lucky to have witnessed several other big success stories founded by some friends and other folks i’ve gotten to know over the years — LinkedIn, YouTube, Yelp, Facebook, Twitter, Zynga, LivingSocial, Yammer, DropBox, etc.  i certainly haven’t walked in their shoes, but i’ve been humbled to watch them grow from small startups into HUGE companies, and continue to be amazed at what can be accomplished by innovative, driven founders and their employees.

so here’s the thing…

Q: how many VCs have done the same with their own VC firms?

how many VCs are there that have successfully grown from a few partners into BIG, HUGE companies with HUNDREDS if not THOUSANDS of people operating all over the world?  where is the Google of VC firms? the Facebook of VC firms? the Apple of VC firms? why hasn’t this happened yet? why aren’t there VCs that invest in HUNDREDS if not THOUSANDS of companies every year?

aside from DFJ & Ron Conway in the 90′s, and Y Combinator & Tech Stars more recently, i’m not sure anyone has even tried. there a few global firms that operate in multiple geographies like Accel & Sequoia. and i’ve been impressed with what First Round Capital has done ramping up seed-stage investing. and it certainly seems like Andreessen-Horowitz is trying to rethink how VC operates at scale.  the Samwer brothers in Germany may not be well-liked, but they have been able to duplicate big successes rapidly. and Jeremy Berrebi in Europe is similar to our own 500 model of lots of little bets. still, at the moment the closest to what “big, scalable” VC looks like is probably either Y Combinator or Angel List… kudos to PG & Naval, they are taking risk, innovating, & putting it all out there.

and yet: the modern venture capital model has been around for perhaps 30-50 years, but we still haven’t quite seen the Henry Ford of venture capital.

we can do better.

 

 

 

Dave McClure

Geeks. Founders. Startups. The Internet Revolution.

Never miss a beat

  • http://twitter.com/claytantor Clay Graham

    Love this post. I would really hope that the biggest reason anybody does anything is because they care deeply about being good at it. Specifically when it comes to being an investor we believe they should see themselves as a *humble* participant in the process. Dave you have humbled yourself and your industry considerably with this essay, and I think its big of you to do so. Kudos.

  • http://blog.jordankong.ca/ Jordan

    Like the spirit of your post, but isn’t VC an inherently unscalable endeavor? People always speak of VC as a people/relationship business. I don’t think that there are the same economies of scale that can apply to VC that apply to internet startups.

    • http://500startups.com/ Dave McClure

      i think VC will *always* be a people & relationship business… and most people will tell you that 500 is first and foremost a FAMILY… but the infrastructure & resources we provide to our portfolio companies & founders, our mentors & advisors, and our co-investors and LPs are likely more powerful if we design them to be scalable & sustainable that doesn’t mean it will be easy.

      • FAKE GRIMLOCK

        FACEBOOK ALSO RELATIONSHIP BUSINESS.

        IT SCALE JUST FINE.

        • http://500startups.com/ Dave McClure

          ZUCK MAKE FRIENDS WITH 1 BILLION GIANT PURPLE ROBOT DINOSAURS — SO PLZ DON’T EAT HIM GRIMLOCK!

          • http://twitter.com/watkins_ben Ben Watkins

            Dave McClure ♥ #YouRock

          • FAKE GRIMLOCK

            NOT PLAN TO.

            IT SERIOUS SUGGESTION. TECHNOLOGY MAKE RELATIONSHIPS SCALE.

            APPLY TO VC.

          • http://twitter.com/naval Naval Ravikant

            The dinosaur speaks true.

          • http://500startups.com/ Dave McClure

            HIM ALWAYS DO.

          • FAKE GRIMLOCK

            WHAT POINT DO OTHERWISE?

          • http://robotlaunch.com/ Andra Keay

            Using technology to scale human transactions is a two edged blade. The legal system in US is increasingly using AI to solve ‘scale problems’ that were also efficient mechanisms for humans to insert innovation and exceptions into the law.

            This isn’t a reason not to try scaling VC, but a suggestion to search for other precedents.

        • http://twitter.com/liubinskas Mick Liubinskas

          FACEBOOK FACILITATE RELATIONSHIP NOT HAVE ONE. 

          • FAKE GRIMLOCK

            BUILD VC PLATFORM DO SAME.

  • FAKE GRIMLOCK

    WHERE GOOGLE OF VC? WAITING FOR VC START WORKING LIKE TECH, NOT BANK FROM 20 YEARS AGO.

    • http://exosphe.re/ Skinner Layne

      VC HAVE CUSTOMER (LPs) ONLY CARE ABOUT MAKE MONEY. VC HAVE INPUT MORE RARE THAN GOLD: PEOPLE NOT FAIL. VC NOT ALCHEMIST, CAN’T MAKE PEOPLE NOT FAIL FROM THIN AIR. NEED NEW PROCESS FOR CREATE NEW PEOPLE NOT FAIL.

      • FAKE GRIMLOCK

        1. CHANGE CUSTOMERS TO EVERYONE

        2. CHANGE MENTORSHIP MODEL TO SCALE.

        INTERNET ALREADY SOLVE SAME PROBLEMS FOR OTHER THINGS. VC WORLD MAKE TOO MUCH MONEY AS-IS TO BOTHER DISRUPT SELF.

    • http://engag.io/ William Mougayar

      I’m not sure we need a Google of VC. VC is a start-up type of business, and it must remains fast and nimble. Big firms VCs even by today’s standards are slower to move, and less risk averse than other smaller VC’s.

  • http://twitter.com/EmergingDomains Emerging Domains

    Interesting insider perspective . . . Since venture capital firms don’t resemble regular businesses, maybe they can keep their low tax rate of  only 15% on carried interest. Or else  when an investment goes public or gets sold, carried interest might become viewed as regular income by the IRS! I don’t think you want that. Stay risky, vulnerable, and fragile – it’s better for you and it’s better for us!

  • http://twitter.com/sarvjeetahuja sarvjeet ahuja

    rocking post Dave. Initially it was nature of operations of VCs which kept it like that. Now it seems to be changing. Secondly, the possibilities of larger scale growth lies in angel investing and not in big investment rounds. Thirdly, how many good entrepreneurs you get to invest into which have potential of building large businesses? Whatever number is there, you need less numbers of VCs to invest into them :)

  • http://engag.io/ William Mougayar

    If there was a model to be copied that scaled, it’s the Management Consulting firm model, like a Deloitte or PWC, McKinsey, etc… Ask them how to scale a Services business with senior partners, managing partners, partners, junior partners, principals, consultants, etc… They figured it out. GrowthWorks tried to do that in Canada, as a “national VC firm”, but they became bloated with bureaucracy, made lots of bad investments, and lost the “personal touch with the entrepreneur”.

    Theoretically, a big firm could cover the whole range of VC investing, from incubating/acceleration/seeding, to early stage, to mid-stage, to high-growth/m&a, to going public focus, etc… all-in-one, and you move the winners through the “manufacturing process”. This kind of company could be Global and have local ties and relationships.

    As an entrepreneur, I’m always thinking of the perfect assembly of VC’s/Angels that each give me a slice of value, but when put together their whole value is bigger than the sum of each.

    This idea makes sense in theory, but will it work in practice remains to be seen.

  • http://www.twitter.com/rohamg Roham Gharegozlou

    You’re not doing too bad yourself, Dave :)

  • http://twitter.com/mkjung Mike Jung

    Bigger does not always mean better :)

    • http://500startups.com/ Dave McClure

      true, but neither is poverty a virtue in and of itself :)

  • http://www.gordonbowman.com/ Gordon Bowman

    Hey Dave, is 500 taking on more mentors right now? Specifically in the sales/mobile marketing arenas? Would love to help out your portfolio companies where I can!

  • http://twitter.com/liubinskas Mick Liubinskas

    Maybe it’s a product of good VC’s not sharing enough of their wisdom through training or processes to allow it to scale like an accounting partnership does? Maybe their protecting their IP under the fallacy that it makes them stronger?

    We’re looking at this issue with Pollenizer and have put more support services around us. We’re more incubator than VC but we invest with big relationships and want to scale. It’s not easy but we’re making progress.

  • jneumann

    Considering the relative sizes of the venture market and other professional services markets, it would be interesting to know what Google-scale really is. 100 partners? 1000 partners? Goldman Sachs has what, a few hundred partners? Their addressable market is a heck of a lot bigger than the venture market.

    I always ask entrepreneurs, when they are trying to do something that others have tried and failed to do, why they are different. NEA wanted to be big from the start, they were national from the get-go and got big fast. But they’re not the Google of the industry by any means. Why not? What did they do wrong? Or is it a systemic problem? How do you solve it?

    In what way would you scale?

    1. Hire more partners (the talent agency model): how do you know if someone is any good? It takes years to build a track record, and once you have you might as well raise your own fund rather than go work for someone else. VCs tend to be somewhat entrepreneurial and pretty ego-driven. Not easy people to hire. And definitely not easy people to keep (cf. TVI, IVA, IVP.)

    2. Hire more associates (the consulting model): delegate everything to people who are not yet partner material while the partner oversees everything. Guaranteed to piss off entrepreneurs and provide a less satisfying job to the partner.

    3. Replace the human element with process/technology/data, allowing each partner to handle a lot more investments (leave the professional services world entirely): might work, and some firms are going this direction. But if you believe that each investment is sui generis, with its own merits and challenges, you have to question just how much scale you can achieve. If you don’t believe this, then you must be a heck of a lot smarter than every other VC who’s ever lived. If you believe THAT then you should probably be a VC :)

    Of course, the VCs aren’t really the money, the LPs are. VCs are just hired guns. If you don’t believe that VCs add much value personally (you’d have to believe this to believe that scaling fast is desirable) then LPs already get the benefits of scale by diversifying across firms without the detriments of scale, like administrative overhead and decreased bargaining power.

    It’s true that almost every other professional services industry has consolidated: audit, banking, ad agencies, etc. Even hedge funds/PE to some extent (in that there are a few firms that are significantly larger than the rest.) It would make sense that VC would also consolidate, so I’m not questioning your premise. I just think it’s an odd thing to WANT to happen. What’s the societal benefit? What’s the benefit to the LPs or the entrepreneurs?

    • FAKE GRIMLOCK

      INCREASE SPEED, VOLUME, OF CREATE, ITERATE, LAUNCH OR FAIL RESULT IN NET INCREASE OF GOOD TECHNOLOGY IN WORLD.

      THAT SOCIAL GOOD.

      ACHIEVE ABOVE WITH LESS CAPITAL PER COMPANY X MORE COMPANIES = LARGER NET GAIN FOR LPS.

      THAT BENEFIT TO LPS.

      GREATER CHANCE TO GET IN + MORE RELIABLE SYSTEM FOR SUCCESS = MORE STARTUPS SUCCEED.

      THAT BENEFIT TO ENTREPRENEURS.

      • http://neuvc.com/ Jerry Neumann

        Most of these things are things that entrepreneurs do, not investors.

        The one thing investors can do is fund more small companies. I don’t think that having a ‘Google’ of a VC firm dominating the market is going to do that better than having hundreds of competing firms. Every deal I’ve ever done I’ve had smart VCs who thought it was monumentally stupid. And plenty of deals I’ve scratched my head at were funded by other VCs. If we all reported into the same system and used the same processes to vet deals, fewer entrepreneurs would get funded.

        And, thinking back to when there were fewer VCs–pre 1968 or so–the pre-money valuations entrepreneurs got for their companies really sucked. DEC was funded by ARD in 1958: ARD got 78% of DEC for $70k. ARD was the only game in town.

        That was great for ARD. Not so much for the founder.

        • FAKE GRIMLOCK

          LIST OF THINGS TO FIX IN NEW SYSTEM NOT SAME AS LIST OF REASONS NOT TO BUILD NEW SYSTEM.

          • http://neuvc.com/ Jerry Neumann

            A list of reasons not to create a single firm that would overwhelmingly dominate venture investments, taking a disproportionate share of the gains for itself? Because isn’t that what Google does in online advertising or Facebook will in social networking? I generally favor letting a hundred flowers bloom, letting a hundred schools of thought contend. I don’t think the burden falls on reasons to oppose, it’s just common sense.

            But maybe I’m doing Dave a misservice by assuming what he meant by getting to Google scale was becoming monolithic. Let’s assume he really meant that he wanted to be able to make more of a difference as a VC (although I fail to see the Google connection here.)

            I don’t think the problem is that not enough startups are getting funded, or that VCs are not taking enough risk. The problems are that VCs are taking risk by going earlier instead of by taking on bigger problems, and that the kinds of companies that VCs are funding are not growing the economic pie any faster than it was already growing (look at inflation adjusted GDP per capita for the last century: on a log scale it follows a very straight line, just as you’d expect if the cause of underlying economic growth was extrinsic to the financing mechanism.)

            Really making a difference in VC would be through funding revolutions, not evolutions. More Genentechs, not more Pinterests. If it’s the latter, the current system is doing just fine. If it’s the former, that requires iconoclasts, not the borg.

          • FAKE GRIMLOCK

            NATURE OF VC BROKEN. THAT WHY KEEP GETTING PINTERESTS THAT JUST SLICE PIE DIFFERENT INSTEAD OF GROW ECONOMY.

            WHEN THING BROKEN, INVENT NEW USUALLY GOOD IDEA.

            GOOGLE OF VC = BETTER VC, NOT VC THAT CRUSH ALL OTHER PLAYERS.

            UNLESS DAVE MEAN OTHER THING.

          • http://twitter.com/deforest Stan DeForest

            The Incubation Factory has a franchise type model that has smaller regional branches backed by a larger institutional ‘mothership’.  Back office support is consolidated.  Funds are capitalized by institutions at the whole and angels at the local level.  Scale and diversification reduces the risks and some profits go to an educational trust to build next generation of entrepreneurs.  Innovation in the VC world?  It’s happening.

          • http://neuvc.com/ Jerry Neumann

            Yes, think Google as archetype must mean different things to us :)

        • Andrew

          This is very true, I hadn’t thought about this point of view. While I see the point the original author is making, I also do agree that fewer entrepreneurs would ge funded, but then this would also open up an area of opportunity for someone else to exploit.

  • http://maxua.com Max Ischenko

    I believe AngelList can really disrupt this space, by removing out inefficiencies in opaque VC market which will lead to new leaders and lots of losers.

  • Andrew

    I wonder if it is because many VC Funds are looking at making huge returns in order to satisfy their large funds? To me, a VC at scale would be lots of smaller funds with part time managers based around the country. Each fund would incentivise people to bring the next best ‘thing’ to them in return for a small amount of equity. Let me know if you want to talk about it, I am inexperience in terms of VC, but I do have a few ideas that I think could work.

  • Kevin

    VCs are in the asset management business. Scale looks more like multi platform asset management shops like KKR and Blackstone, where a single firm running huge AUM can invest across the company life cycle, be it private or public or making the transition from one to the other. Deepening capital intensity rather than just hiring more VC partners investing the same amount.

  • http://www.tracecohen.me/ Trace Cohen

    There are people who angel invest and then there are people who are angel investors. Either way, people have to understand that they aren’t in it to make money because they will probably lose all of their investments.

    With regard to the Google of VC’s, you don’t need it – it doesn’t take hundreds of people to write checks. Oh wait, the JOBS act was just signed, so maybe we will see the Walmart of VC’s emerge…

  • http://twitter.com/Clermont1 Nelson Wells

    We can do better.
    Good comments from Stan, Jerry, & others also.

    I think a few got off track from Dave’s original message which I believe is “We as investors are not very often CEO’s who been in the trenches, bootstrapped, and actually run & failed with small companies, or turned them into powerhouses. We should be maybe.”
    I don’t think Mr. McClure or any of us wants “the Google of VC companies.”
    I think what we want is hard working people experienced in BUILDing COMPANIES to help our next generation of entrepreneurs BUILD their companies. That’s all.

    Otherwise, It’s a lot like your beer swilling uncle who hit a few wins in the late 80′s stock market telling you how Pinterest should be run.

  • honam

    The heroes in the VC industry are not people who build big VC firms but people who help build big companies. Arthur Rock is the best example. He never wanted to build a firm. He worked alone. Check out an article from Time Magazine in 1984 in which Tom Perkins admiringly called Arthur Rock “the best long ball hitter around.” The journalist who wrote that article was Mike Moritz.

    As for examples of firms that scaled, I saw Bain Capital start with a handful of people scale from about $70M in capital to $60B today with more than 400 investment professionals, offices all around the world, investing in VC, buyouts, hedge funds and debt.

  • honam

    BTW, my other hero of the investing world is Warren Buffett. He works primarily alone in a little office in Omaha. Corporate HQ of Berkshire Hathaway is about 20 people (the company has more than 250,000 people all over the world). There is no corporate strategy group, no PR, marketing, legal department, etc. They operate lean and mean.

    A VC firm should not be hiring staff to fill in marketing, design, engineering, sales, legal or other holes in their portfolio companies. Many of the big firms with fat management fees tried that in the late 90s. It didn’t work. I will predict right now that most non-investment professionals who have been joining big VC firms will either leave or will get laid off at some point.

  • Chris Kelly

    If you’re just talking about getting money to entrepreneurs, would you consider Kickstarter a scalable model? While there’s no financial return for investors, as customers they not only get a product, but also get to participate in helping build something they believe in. For entrepreneurs, especially outside of the VC hotspots, it can make it possible to build something that will attract the attention of those nonscalable firms.

  • http://www.freddestin.com Fred Destin

    Urgh.  
    A) Why do we need some canonical “VC” strategy that’s going to work in all cases ?
    B) Google of Venture = Angellist

  • wcsnetwork

    Dave: We placed online a new social network site, yolospace.com, on July 7, 2012 @ 9 p.m.
    Today, we have over 49,000 members are going strong.    While, my company owns several servers, we lack the tech knowledge to insure the stability of this site and require assistance.     Would we be a company that would attract some venture capital?  
    This website has a good head start and continues to grow through our promotional efforts.   I would appreciate your comments or recommendations.

  • Katiajuca

    Loved this article!

  • http://blog.kwiqly.com/ James Ferguson @kWIQly

    The moment a VC wants to treat us like a commodity is the moment we realize we are talking to the wrong people.

    There are support services that young companies need – this is the very purpose of incubation. Incubation is not investment – it is merely a business services model just like window cleaning. It is cookie-cutter like – how to pitch, how to – in fact anything that can be answered by a search engine, the web and a disrcerning mind.

    Highly differentiated from this is the need for startup teams to have mentorship and advice. It may be offered in the same place and by the same people, but it had better be bespoke. Once upon a time business schools thought they could mass produce businesses (and they built machines to assemble MBAs)

    If a VC thinks it can scale it thinks it is a business school.

    The advantages of the model are that a bit of finance, some networking support and some rough polishing in exchange for a bit of equity, is not a bad deal for a company that has none of the above. Its like McDonalds for startups. But you know what some startups (those with good differentiation) need more than fast food – they need nourishment. For these VC will not and never should scale.

    In so far as you remove differentiation you are investing in market beta – and that is best done by buyng an index.