Woody Allen & Venture Capital
I recently watched the fantastic two part PBS documentary on Woody Allen. If you’re a fan of his work, or even if you’re not, I highly recommend it. The thing about Allen that I found most intriguing is his hands-off approach to directing. One would think that such a renown and prolific director as Allen would be a notorious micromanager, wanting everything just so. But it is actually quite the opposite.
Woody Allen is famous for giving his actors room to breath. So much so that actors typically used to much more direction can find it incredibly unnerving to work with Allen. But Woody operates under a very simple principle: Find the best people, help put them in a position to succeed and get out of their way. Coach, guide, but don’t interfere.
As I was watching the film, it struck me how closely this mirrors the venture capital business. Find the best people, help put them in a position to succeed and get out of their way. Coach, guide, but don’t interfere.
I recently read a great post from John Lilly at Greylock reflecting on his first year in VC. Whether you’re an investor or entrepreneur, I highly recommend reading it. The post rang very true to my own experiences, and it was frankly comforting to read. I’ve spent so much time thinking about how to meet the best entrepreneurs and how to connect with them when I do. And the idea of connecting with an entrepreneur as having the potential to become a world changing relationship is a beautiful one.
But as I enter my next phase in this business, I’m also increasingly focused on what happens after that initial connection. Having that spark of shared perspective is critical, but even the best relationships require a lot of hard work.
There is much to learn from Woody Allen in this regard. The best investors I’ve had the privilege of working with over these past few years walk that beautiful line of empowering entrepreneurs to do what they do best, while offering sage counsel, guidance and help when they need it most. I try to walk this line every day and will continue to try and do so moving forward.
So here’s to world changing relationships: discovering them and nurturing them. I look forward to deepening the ones I’ve already made and enjoying the new ones that are hopefully to come.
Craigslist and The Future of VC
Bill Gurley wrote an excellent post yesterday on what is happening to the venture capital industry. His “punch line” is that:
…as these large institutions [LPs] adjust their portfolios and potentially abandon these more aggressive strategies, the amount of overall capital committed to alternative assets will undoubtedly shrink. As this happens, the VC industry will shrink in kind. How much will it go down? It is very hard to say. It would not be surprising for many of these funds to cut their allocation in the category in half, and as a result, it shouldn’t be surprising for the VC industry to get cut in half also.
From a top down perspective, this analysis is spot on.
There is another side to this story at play here as well, and it is captured in Fred Wilson’s post on craigslist yesterday. Fred writes:
I do not believe we should criticize a company that operates like this. We should learn from it. Of all the Internet companies out there, the one that serves as the most iconic for our firm is craigslist, not Google. We dream of funding a company that can be worth a billion dollars with only 30 employees. We’ve never done it and I don’t know if we ever will. But we are going to try again and again and again.
Fred’s perspective here is widely shared in the current VC community. And as traditional tech VCs increasingly focus on capital efficient models, where controlling spend becomes as important as ramping revenue, there is a definitional shrinking in the capital required to fund the sector (assuming some fixed capacity of investments per investor). Even more so, as I commented on Fred’s post, companies like craigslist may not even need or want VC investment, further shrinking the capital required. The craigslist’s of the world may be the unicorns of the venture capital industry. Either way, this is a meaningful departure from the capital intensive telecom and infrastructure investing of the 90s.
What we have here is both a top down contraction as LPs change their risk profiles and allocations to illiquid assets as well as a bottoms up move towards capital efficiency further compressing requirements for venture capital.
So the shrink is on from both sides, which as both Fred and Bill agree, is probably a good thing for the long-term health of the industry. Expect to see fewer, smaller funds, smaller rounds and greater returns. Let’s hope so.
