From here to enternity

Earlier this week at the AlwaysOn Venture Summit East, Harvard Business School Professor Bill Sahlman declared that the "Median rate of return on VC will be 0% for the rest of eternity".  For those of us who have been in the industry for a while, this is not a new statement from Professor Sahlman, although the qualifier "to eternity" certainly is a new time frame for this claim (and for those of you keeping track at home, eternity likely exceeds the length of my investment horizon).  Rather than debate his point of view, when I heard this I sent out a tweet saying simply "I hope he is wrong".  Soon thereafter I got a reply, which I have heard from several entrepreneurs before, that went something like this: "Don't you hope he's right? We want entrepreneurs to get at bats, and the current model makes that possible".  


I was tempted to reply back quickly with the the short answer of No, but thought this topic may deserve more than 140 characters.  So here is the the longer answer.  In the short term, venture capital that is willing to be invested at a 0% expected rate of return is on the margin good for entrepreneurs in that it helps get companies funded and maybe some of these companies will emerge as real businesses and many entrepreneurs will indeed get their at bat.  In the longer term, however, it is unsustainable and bad for entrepreneurs for two reasons.  The first reason is that the abundance of capital leads to too many companies being funded in any given sector, with the net result being that interesting sectors that can support maybe 5 companies now have 20+ companies pursuing the same customers, partners, and employees and each company is weaker as a result of the level of competitive intensity for scarce resources.  The second reason is that venture capital as a "asset class" competes for capital from investors and if the returns are not interesting, capital will go elsewhere where the expected risk adjusted returns are higher.  Further, venture capital is an inherently illiquid investment and, because of the illiquidity, our investors look for a premium return when they can not access their capital for longer periods of time, just as you get (and demand) a higher interest rate from your bank when you commit to a 3 year CD versus the interest rate you get in your always accessible checking account.  The general rule of thumb is that venture capital needs to generate returns that are 500-1000 basis points greater on a per annum basis than a similar equity investment, say the S&P 500 or the Nasdaq 100.  As a result, unless you are expecting the broader public stock markets to decline by 5-10% per year, a 0% rate of return in venture capital is not sustainable and the industry as a whole will contract, resulting in less capital for the industry and entrepreneurial ventures.  So while it may seem appealing on the face of it to have the industry run for the broader good of innovation, in the end we – meaning entrepreneurs and venture capitalists together – need to earn our keep every day to ensure that capital remains available for great people and ideas.

VCs and Recruiting

There is an old expression in the Venture Capital business, coined initially I believe by John Doerr, that VCs are really just glorified recruiters.  Given a number of portfolio company searches I have been involved with over the past few months, this is definitely feeling like the case.  

So while I think the entrepreneurs in our portfolio companies do the real leg work in recruiting, and being an excellent recruiter and team builder is a key skill of the executives we back, there are a few important contributions a strong venture capitalist can bring to an executive search at a portfolio company:

  1. A broader context.  If a founder of a company is looking, for example, to recruit a VP of Sales, depending on what they have done before this could be their first time doing so.  An experienced venture board member, on the other hand, might have helped recruit dozens of such executives which provides a broader context in which to assess the executive's skills and fit with the given company.
  2. An extended network from which to surface candidates.  This can result in the VC surfacing up a specific candidate, or knowing enough people who themselves can surface up candidates.
  3. An ability to more deeply reference check a given candidate.  As anyone who has recruited executives knows, reference checking the candidate's background is critical to understanding their skills and fit.  But being able to do so "off-list" is even more important as the key to references is not speaking to the people the candidate provides, but rather understanding who, and speaking with, the references they don't provide.  By the nature of having been involved with many companies over the years, a good VC will often be able to get to these off-list references more readily than the executive team.
  4. An ability to help provide a candidate a third party perspective on the business and why it may represent a good fit for the candidate.  Talented folks will always have other choices and the best candidates will want to do significant diligence on the opportunity.  While not completely unbiased, a venture investor can often provide this perspective and share diligence on what led to their investment decision.
  5. An ability to keep executive search firms honest.  Search firms, while often an important part of a successful recruiting process, need to be managed to avoid them slacking off at the end of a long search or promoting candidates to finish the search regardless of whether the particular candidate is a good fit.  A recruiter is less likely to do this with the involvement of a venture firm given that the venture firm often represents a long-standing relationship and a steady stream of referrals.

So if you are an entrepreneur looking to build out your team, put your venture board members to work!

Thanks NESEA


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This post is a quick shout out for the Northeast Sustainable Energy Association for the solar car competition they created and sponsor.  This event, called the Junior Solar Sprints, is for students in grades six to eight and involves building a small solar car that then is entered into competitions at sponsoring schools, then regionally (for the Boston area this was at MIT a few weeks back) and culminating in the finals, which were held on Sunday in Springfield, MA and included 128 cars from as far south as Washington DC to as far North as Maine.  The cars are judged on speed as well as on technical merit, innovation, design and craftsmanship with the winners at each level advancing to the next event.  The creativity all the kids showed was truly impressive.


In an era where the quality of science education in middle school is questionable and as a country the US is training far fewer scientists and engineers than we should be, events like this that bring concepts to reality and energize the students are fantastic.  Seeing the kids thinking creatively about topics such as design goals, friction, gear ratios, momentum (and how lower mass equals greater velocity for a fixed power source) is great to see.  Further, the contest also sparks good discussions about energy sources and what we as a society need to do to develop more sustainable energy alternatives.  If this program is not in place at your local schools, encourage them to look into how to participate.