Running an internationally “distributed” venture capital team obviously isn’t a trivial matter: partnership is based on communication and trust, and it is hard to achieve both when on most days, you’re 10,000 kilometers apart from each other.
Our distributed model does strike many people as odd: we’ve been told that we’re “spread too thin”, that we’re “too different” culturally and professionally, and one person even commented that it’s impossible to run a VC fund without a headquarters.
In a recent meeting we’ve had with a prospective LP for our 2nd fund, he ranted, “Why can’t you be like all the other funds?”
We smiled, and one of us asked him: “How many of all the other funds perform to your satisfaction?”
“About 5%”, came the reply.
“So why would you stick to an old model that, according to your data, doesn’t work?”
And here’s something to think about: how bad does the old paradigm need to perform in order for the limited partners, pension funds, family offices, and wealthy investors who fuel the venture capital industry with capital to see that there’s a need for an innovation in the VC industry after over 40 years of financing innovation?
This “Thomas Kuhn / Clayton Christensen” question was one of the issues we discussed in Hong Kong.
Although we speak, chat, or email almost every single day, we find our quarterly “quartet” meetings very useful. We get together, prepared with our “homework” to the agenda questions, and clash with our different perspectives, cultures, experiences, and anecdotes.
We like it when we have to mesh things together and create something fresh, original, new.
Everyone likes the comfort that comes from the certainty of doing things the old way, where no one can blame you personally for making a mistake, but how can you support innovation if you don’t innovate the way you do things?
Our shared global perspective shows, as expected, that each market has its own set of unique advantages and hurdles. Among other things, we’ve discussed in great detail the many great challenges for Europe in trying to artificially “jump-start” tech ecosystems in multiple economies. They are trying very hard, but mostly the ‘old paradigm’ thinking is causing most of the billions of Euros flowing into the space to be ill-spent.
As the same time, sizzling hot ecosystems such as Silicon Valley and Israel are dealing with the rising costs of tech developers, and China is struggling with too much capital flowing into tech, causing inflation in the valuation of companies.
While Silicon Valley is still the leading tech ecosystem, the trend shows that ‘international’ startups, as our US partner calls them, will be the majority of value created in VCs within a decade. This is not really a prophecy – it’s already happening.
The capital flows into the downstream, big-ticket investing, where private equity funds are stepping on the toes of multi-billion VCs, creating a competitive pressure that the old VC paradigm cannot handle: if everything is done manually, personally, by star investment managers with super-intuition, how can they meet thousands of entrepreneurs per year in person? They can’t.
So, they are using…rules of thumb… to preselect which teams they’d meet (seriously, they are).
We’re still pondering why some people would prefer rules of thumb over data-driven analysis. Would they prefer getting medical treatment from a doctor who refused to use computers and MRI? Do they honestly believe that a doctor who uses technology is devoid of intuition?
Data-driven decision making, while a bit premature and sometimes offensive to the old timers’ rule of thumb approach, will take on a significant role in the coming decade.
Just as MRI and CT imaging equipment served to make doctors better rather than to replace them, we believe that some data-driven tools will prove highly influential and valuable.
There’s a dichotomy that divides investors into one of two camps:
Pickers and gamblers – playing the odds, they believe that their job is simply to pick winners. They compete with everyone else. Business is war to them.
Company builders – choosing the right teams, the right markets, and helping make things happen. They look for win-win cooperation opportunities. They don’t need others to “lose” for them to be successful.
And while most data tools aim to just help investors “pick winners”, as if this were a sequel to Wall Street’s quants and ‘blackboxes’ wave of algo-investing, we believe that venture finance is also about helping entrepreneurs to choose the right path and think about matters in the right way. (We believe in mutual value creation: this is why we share our tools, methodologies, contacts, and algorithms with our partners).
Hence, truly valuable tools will also direct entrepreneurs and provide them with a feedback loop on whether they are on track or not. This is our vision for our Raving fans algorithm, which we plan to evolve into a data analytics platform that will focus entrepreneurs and founders (and, we believe, managers of established companies as well) on the right type of customers for their products and services: Raving Fan customers.
Some methodologies are currently still relationship-based and centered around humans, not computers. Such is our RPS (reverse problem-solving) method.
Another advantage of being “spread too thin” is that we can help accelerate portfolio companies across the globe. Indeed, some of our portfolio companies have asked us to give them some time to catch their breath…
In the future, we intend to have more than just our personal connections to help companies acquire strategic reference clients around the globe (hint, hint ? ). True, US customers are still the biggest (that’s why we’re active in the USA too), but they are not the only ones (or even the majority of customers, for that matter). In a global economy, doesn’t it make sense to leverage international clients to reach critical mass faster?
Besides the fact that it’s one of the world’s greatest cities, we took this time to have a few days “off-site” to throw our various experiences, knowledge, preferences, and ideas into the Follow[the]Seed “melting pot”. We let it cook slowly for a couple of days, and the stew that was served was a strategic plan for 2018 and 2019.
And it was delicious.
Would you like to try it too?