Chris Dixon, Founder Collective: ReVisioning Venture

Transcript follows & video below.  This is the Part II of the interview. You can view Part I here

In the first interview that I did with Randy Komisar, Kleiner Perkins, I quoted statements that you made in a Gigaom interview (which I thought was a great interview) about how the venture industry was broken. To summarize his response: ’If venture capital is not producing an outsize return for the risk that they take on, which is outsize risk, then the limited partners do not need to invest in the second, third, fourth funds that these venture capitalists put together. And that will by necessity sort of reduce the amount of competition & help to discipline the market around returns’.  Chris how would you respond to this?

I think there’s some truth to that. I think that one issue is that most vc funds last, they’re actively investing for 4 years, and they survive in some form for 10 years. It’s very slow moving. You don’t really know your returns for 10 years. So while in an ideal world that would be true, in reality I think it does happen, it just happens over a very long period of time. I think there’s also other dynamics at play. These LP’s usually aren’t investing their own money. They’re people that work at pension funds, endowments etc and just like in any situation where somebody is investing on behalf of somebody else, there’s what economists call ‘agency problems’. Sp for example, I think there’s a bias, if you’re running a pension fund (I’m just making this up). Let’s say you’re running the Tennessee Teachers Union Pension Fund. In the same way they used to say no-one gets fired for buying IBM, I think no-one gets fired for investing in Kleiner Perkins, right? Even if the returns end up being terrible, as an employee you’re like ‘Look I invested in a fund that had great returns in the past, right?’ They aren’t investing their own money right? I have a blog post somewhere about this where there’s a quote HarbourVest is one of the major LP’s fund-to-fund in investment vcs. There’s a quote where they in the New York Times talked about how they’d just invested in a big prominent vc fund & they’re like ‘Well we think in a more competitive market their brand is going to be, the fact that they’ve been around for a long time, is going to be helpful. And I thought it was funny, I won’t mention who it was, but that particular vc firm is probably the most disliked by entrepreneurs of any vc firm. What they perceive is a good brand & probably what that money manager at that fund-to-fund sees as like a successful investment & is her boss sees as a successful investment because they got into some name brand firm, really has a negative brand because they don’t really know. They’re not really close to the entrepreneurs & knowing what’s really going on. So I think there’s some truth to that, it just takes a really long time & there’s agency problems. So I would describe that as the idealized view of it.

Chris Dixon

So it’s not as black & white as what he’s saying?

I think over a 30 year period, that’s probably true.

Chris Dixon

Thanks for that response. In the more recent interview with Gigaom  you said that you see your blog as a ‘VC Countermeasures Blog’ (go through all the tricks they do & expose them). That’s why I like you, you contribute such a different viewpoint. The radical & honest part of me loves your courage & ability to say the truth as you see it. In that interview you mentioned one post you wrote that stated that the history of venture capital innovation is the history of how to create options on startups in more obfuscatory ways.  I recently interviewed Tim Draper, Draper Jurvetson, who mentioned that every time he tried to make changes to venture investment in his firm, the limited partners don’t like it.   How do you see the venture industry being able to change, if they are held back by LLP’s?

I think that’s a good point. I was surprised when we raised our fund. The typical way vcs are paid is the so called 2 & 20: which the 2 refers to management fees which basically means (it varies but generally these are the rules that 2% of the money under management is paid every year in salaries & operating budget) and then 20% refers to the carry which is the percentage of the profit they get. I wanted to, in our case for example, make it much more performance driven. Much more like a startup where basically the vc firm doesn’t make any money, unless the investors in the vc firm make money. And actually I was surprised that there was pushback. I think Tim Draper was right. In my experience there was pushback from the LPs who were much comfortable with what they considered a standard structure. Even though it would seem…I don’t know if you were investing wouldn’t you want to know that the people you were investing in had the same percentage as you. But for whatever reason & I don’t really fully understand it, there’s this resistance, I think there’s this sort of fear of new things, don’t fully understand it. Maybe there’s accounting issues around it? I don’t really know.

Chris Dixon

It’s changing tradition too really isn’t it really?

Yeah & I think what has to happen is that people with the kind of leverage, I don’t know the Sequoia’s of the world or something, have to lead the way? Because only people with that kind of clout can probably dictate?

Chris Dixon

You also wrote a post which I really appreciated a few weeks back ‘Things I’d do if I ran a big VC firm’ where you had some great suggestions for VCs including: *lower management fees so that they cover necessary expenses an reasonable salaries (e.g. 200K, not 3M). basically be like a startup and only make real money when your investors make money *I’d hire some female investors (and maybe some male receptionists).  I must say that I am always disappointed to see so.. few women on the lists of partners or associates in venture firms & when I go into the offices the women tend to be admin staff. It does seem that the venture industry has a much higher proportion of males than females. Why do you think that has happened & why has it continued?

(You really know my posts!) I hope, as I mentioned before, it’s a legacy of a bygone era & ironically it’s a very, very slow moving industry. It’s ironic (I don’t know if it’s really ironic) but they are all about changing the world & investing in change but because of the structures of these funds, it just takes so long. So what happens is that these partnerships, they’ll raise a fund. If you look at the average returns of the industry as a whole, they’re basically zero for the last decade. Which means that they’re really making all their money on these management fees which basically the disproportionate amount goes to partner’s salaries. So there’s a real financial incentive to just hunker down & just not promote new people to be partners. So there just isn’t much change. My hope is that it is just a legacy of a different era & it’s changing incredibly slowly but it will change. But maybe I’m naive?

Chris Dixon

Well let’s hold your focus, I would like to see it change too.

By the way I think its not just some kind of societal important for gender equality & all these things, I think they would be better investors. Because half the market are women & a lot of investments are going to target women. Women investors are probably better at understanding a lot of those things. If I had my own vc firm today & could pick anyone to run it, no doubt I would have a couple of them being women just for financial reasons.

Chris Dixon

I know Tim Draper said that they only had one female venture capitalist left, the other one had left, but he said she was so intuitive that she would always spot things that the other 6 guys never saw & he just found it so valuable. So we obviously have something to contribute. Thank you so much your time, I so appreciate it. I know how busy you are & it’s been a total pleasure meeting you & also getting your feedback. Thank you so much.

Thank you I appreciate it!

Chris Dixon

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