Transcript follows and video below. This is Part II of the interview. You can view Part 1 and Part III here.
It appears that many businesses/corporations are slowly being exposed for how effective & valid is their business model. Some have been shown to be corrupt or do not have on a solid business foundation. Business models are being held up to scrutiny over the last couple of years & I predict that this process will continue for a few more years until real changes/shifts in consciousness are made. With changing technology & a changed environment including better educated & large accessible markets, do you find many startups being creative with business models? I read a blog post the other day by an entrepreneur saying that you cannot extend your personal moral code to business, at the end of the day it’s just about profits. As a Tibetan Buddhist, we believe in having ‘right livelihood’ & making a real difference through work & encompassing our moral code. I know in your book ‘The Monk & the Riddle’ you take a holistic view too, do you continue to see success with startups whilst they serve their customers & honor their moral codes?
Its a good set of questions. I can’t imagine divorcing my values & principles from my work. Business in the final analysis is simply a tool by which we achieve some good. We achieve good for our customers, we achieve good for our employees & hopefully we achieve good for our communities? Its only a set of tools & its only as useful as the good it creates. I’m not a business person because I love the notion of being able to win at somebody else’s expense. Or to sell something at somebody else’s expense? Or to profit when somebody else is actually losing in the transaction. I love business because of the value it creates & that value has to have values attached to it. And if it becomes a shortcut for buying low & selling high then in fact it is not very valuable to society, its not very useful. It becomes very selfish & I don’t think that business at its heart needs to be selfish. Though unfortunately the way that its practised, we harness the greed of business to accomplish prosperity & to achieve success. And that’s a fairly fine line between what we think about as value & what we think about as valuable.
So first & foremost, I cannot condone the divorcing of principles & values from the concept of business. I think that the two go hand in hand. I also think that the notion of business model is often misunderstood. A lot of what we are seeing as rickety in the last internet bubble was the lack of business models. The reality was that there were a lot of things that were at fault. Business models very often aren’t very evident early on, as you create value. Oftentimes that value particularly in things like internet media, internet content, is not directly transactable. You are not going to get someone to pay you for the minutes or hours or days of content consumption that they may actually get off the net. You have to have a very sophisticated business model in order to be able to profit & sustain that content. And so its not uncommon in my business to back a company who has identified a great problem who has a particularly compelling solution but still does not have a way of capturing the value that is clear.
Look at a company like Twitter or look at a company like Facebook 4 or 5 years ago. Facebook didnt have a business model that was very evident other than a very very large scale. We’re seeing a business model evolve there. Twitter we’ll see whether a business model evolves there. But clearly there’s value created there because we see so many people using it for such a diverse set of purposes. So I think its important to keep business models in context. It is ok to start a business without a clear sense of how you are going to capture the value. What’s not clear & what’s not ok is to create a business where you are not resolving a problem & creating the value. If you create the value then you can constitute a business model hopefully that will support the business. If you create a business that doesn’t create value but simply leads to profit, that is a fundamentally flawed business.
Randy Komisar
That is really clear. I guess what you’re saying is that we are in a state of flux at the moment with business & business models. And is it still viable when businesses or startups are still successful if they have honored their moral code, do you think? Randy:
I certainly believe so, but that doesn’t make them viable. It may make them successful in the context of the entrepreneur’s vision. But it may not make them viable. And the two need to come together. The idea of profitability is the law of physics in business. When we think about how we build businesses today in a dynamic market like the United States profitability is a forgone conclusion. Because without it you can’t continue to deliver your value. You need to have a model that provides for that value. In the newest book that John Mullins & I just wrote, ‘Getting to Plan B’, we talk about building businesses with unclear business models. Where the problem is very clear, the value creation is very clear – the business model evolves. And it evolves in a very disciplined way but it evolves without necessarily being part of the initial plan.
Randy Komisar
I must get that book! Gigaom recently did a video interview with Chris Dixon cofounder of Hunch, where he takes the position that the VC model is broken. “VC’s raise valuation of startups & put more money to work (fixed % ownership basis). He believes that any market where a buyer is arguing for a higher price then something is wrong with that market. VC’s take out 20% in management fees & carry which is 20% of the profits, so effectively all money is made in management fees as the industry hasn’t made any profits to date. Need to justify their funds to LPs so need to put money to work?” What are your ideas about the venture capital industry model now, I know that you actively work with startups as a ‘Virtual CEO’ so you may have a different perspective?
I think Chris is right that the venture industry is stressed at the moment. Its stressed by the fact that there haven’t been a lot of liquidity events, particularly IPOs in the last decade. That’s a long…dry patch for the Venture business! The venture business works by raising money from large institutions mostly endowments or pensions that are placed by Kleiner Perkins & wealthy individuals. Putting that money to work in high risk ventures & then harvesting the successes in IPO or healthy mergers & acquisitions market. And then redistributing that money to the investors who then invest in your next fund. And in the process the venture capitalist profits both by taking in annual fees for the management of that fund as well as sharing in the upside (that’s called the carry). In a market like we’ve been in today there’s been very little positive carry to the venture capital business because there hasn’t been much liquidity.
I would argue that the thing that is probably most broken in Venture Capital business today is the lack of liquidity. If there was a great deal of liquidity in the market, even a reasonable amount of liquidity like in the early 90’s before the boom, I think that we would find a very healthy environment where there is disciplined investment, appropriate amount of investment & the right amount of work being done to build & harvest these businesses. But today we don’t live in that environment & so its much more challenging to put that money effectively to work. Add that to Chris’s insight that a lot of the internet web consumer companies don’t need a lot of capital to test out their ideas, and you’re in an environment where its very hard to invest large funds. Here at Kleiner Perkins we invest not just in consumer internet which we are enthusiastic about, but we invest in a whole lot of other things which we call digital technology – financial services, book rentals, you name it: we invest in it! As well as in Green tech where large sums are still required to be able to launch ideas because of the amount of research & development & the timelines & scale of the projects as well as Life Science.
So a lot of what we hear about what’s broken in the venture capital business ties to two things: the consumer internet & the challenges of investing in a market where only small amounts are necessary to test ideas and the lack of liquidity. In places like Kleiner Perkins we have a much broader purview than that & so we are investing for the long term expecting that we will create value, expecting that there will be an opportunity to harvest that value & making sure that we’ve got the capital to get from here to there. Ultimately the limited investors in these venture capital funds get to vote with their feet. 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.
Randy Komisar
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