The Exchanges

Q Ok, so let's start at the very beginning then. There's always this perception that VCs have this ton of money and they're very well financed, but where do venture funds actually obtain their funds from?

A It's, yeah, and, and of course, in our definition, the bright line between a venture capitalist and an angel is an angel or angel group is, is an individual or, or a group of people investing their own money. Ah, in the case of VC, the money is, it's third-party money. They're raising it from someone, ah, somewhere, typically, ah, an institutional investor, and if you go back to the early days of the industry, the seventies, the eighties, ah, the pension funds and, and the changing of the rules to allow the pension funds to invest really is what got venture capital off the ground, of the so-called prudent man rule, and, and things that enabled pensions to, in a measured and prudent way, ah, get involved. A lot of those pension funds now, uh, with the shift away from defined benefit plans, really aren't the factors they once were. So, um, virtually all of the money raised by a venture capital fund comes from, in many cases, family offices, uh, some cases, sovereign wealth funds, uh, colleges, uh, universities, other charitable foundations that are out there, uh, and, and there's still some pension fund money in there, um, Uh, but, but with the pensions now, uh, seeing aging populations, they're, they're generally not in a position to be doing the, the 10 to 12 to 14 year lockup, which, which a venture capital fund typically is. They, they can't commit to that level, uh, time fra…

AI assessment note: “virtually all of the money raised by a venture capital fund comes from, in many cases, family offices”

Q And do you see VCs also making angel investments on the side? Is that a common practice in the industry?

A Yeah, it's all over the place. You, you have a lot of the original founders of the venture industry now retiring. Um, in, in some cases, they're, they're leaving the funds that they founded, and they're, they're, they're still passionate about building companies, and that's what gets them out of bed. Uh, and they're, they may not be in a position or have an interest to sign up for another 14 years of, of managing the life cycle of a fund, so they'll go out and they'll make their own investments. Uh, typically that comes a little bit later in the career. Uh, you know, when a, when a younger, uh, VC or VC right in sort of the middle of, of the career, uh, is investing, the, the investing is done on the part of the fund and not, not the individual.

AI assessment note: “Yeah, it's all over the place.”

Q And why do you think VC funds do have the 10 to 13 year lockup that say mutual funds don't?

A Yeah, I mean, the, the bottom line is that the, the, the money typically first goes in, uh, you know, whether it's two people and a dog in a garage or, or, you know, something coming out of a laboratory, uh, you, you can have in many cases a three to five year initial investment period as, as the thing scale, as, as the thing gets going, maybe as it gets to proof of concept or as it gets to first sale, uh, Or it gets to the point where it finds its business model and things start to scale up. And, uh, especially in, in recent years, the last four or five years with the, with the dearth of IPOs, you see companies that have been waiting anxiously for the opportunity to go public, uh, seven, eight, nine, 10 years. Uh, and, and by the time they're able to get out, by the time they're able to go public, Um, that could be 12 years or longer, uh, from, from the initial investment. So, is some of that a sign of the times, the fact that the IPO markets were, were tough, uh, you know, three, four years ago? Yeah, I think that's a lot of it. Uh, and you look at, uh, just in the past, uh, gosh, I mean, the past three years, uh, 2013, 20 14, 2015, and the, the interesting thing is that the majority of the IPOs in each of the That period where, uh, were biotech companies, which, which historically is only about 20% of the money, but many of these companies have been waiting patiently to go p…

AI assessment note: “by the time they're able to go public, Um, that could be 12 years”

Q So if you were to select one service which is the most important value add That a VC can bring to a startup. What would you say it would be?

A Gosh, it's tough. I mean, I think the short answer is people. You have many one- and two-person companies that's got, that's gotten funding, but I can't think, maybe with the exception of Enron, a one- or two-person company that's gone public, and at some point during that journey, whether it's getting from 10 people to a hundred to a thousand, uh, that company needs to be filled with talent, and someone, uh, an entrepreneur may not know where all of that talent lies, whereas a VC probably has a history of working with other startups, but even more important, companies that are just now maturing, uh, where you have, uh, I'm thinking now Google, Facebook, and so forth, where maybe you have talent that's ready to Ready to come out and, and, and, uh, try their hand in a, in a different environment.

AI assessment note: “I think the short answer is people.”

Q And do you see VCs also making angel investments on the side? Is that a common practice in the industry?

A Yeah, it's all over the place. You, you have a lot of the original founders of the venture industry now retiring. Um, in, in some cases, they're, they're leaving the funds that they founded, and they're, they're, they're still passionate about building companies, and that's what gets them out of bed. Uh, and they're, they may not be in a position or have an interest to sign up for another 14 years of, of managing the life cycle of a fund, so they'll go out and they'll make their own investments. Uh, typically that comes a little bit later in the career. Uh, you know, when a, when a younger, uh, VC or VC right in sort of the middle of, of the career, uh, is investing, the, the investing is done on the part of the fund and not, not the individual.

AI assessment note: “Yeah, it's all over the place.”

Q So these institutional investors, they give their money to VCs, and do they get charged a management fee that's a standard management fee? Is there a standard management fee? Um, do they have expectations? What, what are the typical expectations of a VC fund return?

A Sure, well, typically an institutional investor would be looking at the whole spectrum of places where they can put their money, and they would have certain expectations on the public markets, and And then, you know, varying asset classes, whether it be hedge funds or private equity funds or venture funds or whatever, there is an expectation that in return for the additional risk, in return for the lack of liquidity, that there is a premium. And lots of times you'll hear institutional investors saying that they want at least 300 to 500 basis points better than what they think they can do in the public market. Which is three to five percent. So if they're thinking they can do six percent return in the public markets, and then they're looking on a whole from venture for, for at least nine to 11%, uh, uh, returns. Uh, so the 300 to 500 basis points is, has been a pretty common benchmark. Uh, when you look at how venture has done over time, uh, and, and we have a period of about You know, 15 years ago to a period about three, four years ago, where returns were tough for venture, but, but historically, venture capital funds have returned to their investors net, um, about 25 to 30%. It's been a very, very good performing asset class over the long haul.

AI assessment note: “want at least 300 to 500 basis points better than what they think”

Q So if you were to select one service which is the most important value add That a VC can bring to a startup. What would you say it would be?

A Gosh, it's tough. I mean, I think the short answer is people. You have many one- and two-person companies that's got, that's gotten funding, but I can't think, maybe with the exception of Enron, a one- or two-person company that's gone public, and at some point during that journey, whether it's getting from 10 people to a hundred to a thousand, uh, that company needs to be filled with talent, and someone, uh, an entrepreneur may not know where all of that talent lies, whereas a VC probably has a history of working with other startups, but even more important, companies that are just now maturing, uh, where you have, uh, I'm thinking now Google, Facebook, and so forth, where maybe you have talent that's ready to Ready to come out and, and, and, uh, try their hand in a, in a different environment.

AI assessment note: “I think the short answer is people.”

Q So these institutional investors, they give their money to VCs, and do they get charged a management fee that's a standard management fee? Is there a standard management fee? Um, do they have expectations? What, what are the typical expectations of a VC fund return?

A Sure, well, typically an institutional investor would be looking at the whole spectrum of places where they can put their money, and they would have certain expectations on the public markets, and And then, you know, varying asset classes, whether it be hedge funds or private equity funds or venture funds or whatever, there is an expectation that in return for the additional risk, in return for the lack of liquidity, that there is a premium. And lots of times you'll hear institutional investors saying that they want at least 300 to 500 basis points better than what they think they can do in the public market. Which is three to five percent. So if they're thinking they can do six percent return in the public markets, and then they're looking on a whole from venture for, for at least nine to 11%, uh, uh, returns. Uh, so the 300 to 500 basis points is, has been a pretty common benchmark. Uh, when you look at how venture has done over time, uh, and, and we have a period of about You know, 15 years ago to a period about three, four years ago, where returns were tough for venture, but, but historically, venture capital funds have returned to their investors net, um, about 25 to 30%. It's been a very, very good performing asset class over the long haul.

AI assessment note: “institutional investors saying that they want at least 300 to 500 basis points better”

Q And why do you think VC funds do have the 10 to 13 year lockup that say mutual funds don't?

A Yeah, I mean, the, the bottom line is that the, the, the money typically first goes in, uh, you know, whether it's two people and a dog in a garage or, or, you know, something coming out of a laboratory, uh, you, you can have in many cases a three to five year initial investment period as, as the thing scale, as, as the thing gets going, maybe as it gets to proof of concept or as it gets to first sale, uh, Or it gets to the point where it finds its business model and things start to scale up. And, uh, especially in, in recent years, the last four or five years with the, with the dearth of IPOs, you see companies that have been waiting anxiously for the opportunity to go public, uh, seven, eight, nine, 10 years. Uh, and, and by the time they're able to get out, by the time they're able to go public, Um, that could be 12 years or longer, uh, from, from the initial investment. So, is some of that a sign of the times, the fact that the IPO markets were, were tough, uh, you know, three, four years ago? Yeah, I think that's a lot of it. Uh, and you look at, uh, just in the past, uh, gosh, I mean, the past three years, uh, 2013, 20 14, 2015, and the, the interesting thing is that the majority of the IPOs in each of the That period where, uh, were biotech companies, which, which historically is only about 20% of the money, but many of these companies have been waiting patiently to go p…

AI assessment note: “that could be 12 years or longer, uh, from, from the initial investment.”

Q I'm switching sides of the table slightly now. What do you think VCs look for when investing?

A Well, yeah, well, I, I think it's, it's all on the upside. And, uh, you know, it used to be that VCs and companies would, would match up geographically, and you would go down the street to the venture capitalist down the street, uh, who is geographically close by. It's much more complex now, and it's much, much more sector specific. And, and, uh, and, and, Not a sector specific, but sub, sub, sub sector specific, and, and, um, there, there's, there's less dependence these days on geography, and more on specifically what the company will do, and so you even see some of the West Coast postal, uh, coastal firms making investments elsewhere, uh, maybe a university or government lab or something has an intriguing encryption or some kind of e-commerce technology. In some cases, that The firm, uh, the, the, say the coastal firm would make the investment directly. Other cases, uh, they'd be looking for someone on the ground that could, could, uh, actually get, uh, involved in it. So, uh, you know, that's a, so, so, you know, what is the upside? How does this play with my Rolodex and who I can bring into the company? How does this play with, um, Other portfolio companies that we have, and where we think the internet is going, and so forth. All of these are questions that are, that are being asked, and perhaps geography a little bit less. You also have VCs, frankly, having to meter their…

AI assessment note: “How does this play with my Rolodex and who I can bring into the company”

Q And how do VCs compete against each other in the very kind of hot rounds, say, of your snap Chats and Ubers. How do they really attain that position in the funding round?

A Well, I, I think it goes back to the question of talent, uh, you know, who they can bring in as the company grows. Uh, certainly there's, there's the, there's the, the deal terms themselves, the actual valuations, and the, the dollars involved, and so forth. Uh, yeah, each of these rounds now is getting uh,, there's a changing dynamic Largely in Silicon Valley, but we're seeing it elsewhere with some of these headliners. And that is that the VCs themselves are coming to the table with roughly the same amount of money they have the past few years. But we're seeing the total amount invested, the total size of these rounds, um, expanding by, you know, 40, 50%. The total amount of venture-led rounds, the dollars has gone up dramatically. Uh, and so in many of these, you have corporate venture capital groups that have become very active, but even more so with some of these headline or later rounds, you're seeing mutual funds, uh, you're seeing, uh, hedge funds, you're seeing private equity players that are not traditionally, um, uh, engaging, uh, with these startups and, and with these pre IPO companies. So it's a changing dynamic. And so, um, An entrepreneur looking to see which VC to work with, uh, in the later rounds would probably be looking at the Rolodex and the experience and the, the, the working relationship between those VCs and, and some of these, some of these third part…

AI assessment note: “looking at the Rolodex and the experience and the, the, the working relationship”

Q So what do you think biotech has seen its opportunity where maybe others haven't?

A I, I think in the case of biotech, it's just been pent up demand. I think it's been, I think the, the, the public at that, you know, these things move in waves and, and the public was identifying with companies like Facebook and, and some of the, some of the things that maybe consumers use and touch every day. And that's just an easier sell, uh, on an IPO. But if you look at, if you go back to nine in the 19 nineties, And look at what percentage of the first fundings in the nineties ended up going public. It was 14%. So basically one in every seven companies that got a dime of venture financing, um, went public. Now, because it takes so long, it's very hard for us to know, um, you know, what the current crop of companies or even the crop of companies eight or 10 years ago, uh, what their outcome will be. But, um, my guess is it's going to be five Maybe six percent. It's just a much, much smaller number that, um, are, are able to get out. So, you know, with that, you have the changing expectations, uh, on the part of the entrepreneurs taking money, especially if they're going in position is that, that they're going to be a slam dunk to go public when, when they get to the right point.

AI assessment note: “I think in the case of biotech, it's just been pent up demand.”

Q And can I ask, do you think a VC can really be, Be a VC and a fully-fledged active VC if they do engage in a lean VC method like Dave McClure's 500 Startups where they don't take board seats?

A Well, yeah, the short answer is there are different models, and typically a round of financing will involve a VC taking a board seat. Now, a lot of the rounds are syndicated, and at some point, The value added of the VC is the VC's expertise and Rolodex and experience, connections, everything else. So I don't see how you can get completely away from that, but, but there are firms out there that, that provide different levels of service, different levels of engagement. Uh, Andreessen Horowitz, for example, comes to mind. Uh, there are some other firms, including back in Boston and the East Coast, where they actually have A deep, uh, I'll call it a bench or a resource pool that's brought to bear on the companies, and, uh, that's part of the services provided by the venture capitalist as, as part of the, part of the investment, and part of ensuring that whatever span of control, however many board seats a VC can take, that that company has the, the best fighting chance of being successful.

AI assessment note: “Well, yeah, the short answer is there are different models”

Q And how do VCs compete against each other in the very kind of hot rounds, say, of your snap Chats and Ubers. How do they really attain that position in the funding round?

A Well, I, I think it goes back to the question of talent, uh, you know, who they can bring in as the company grows. Uh, certainly there's, there's the, there's the, the deal terms themselves, the actual valuations, and the, the dollars involved, and so forth. Uh, yeah, each of these rounds now is getting uh,, there's a changing dynamic Largely in Silicon Valley, but we're seeing it elsewhere with some of these headliners. And that is that the VCs themselves are coming to the table with roughly the same amount of money they have the past few years. But we're seeing the total amount invested, the total size of these rounds, um, expanding by, you know, 40, 50%. The total amount of venture-led rounds, the dollars has gone up dramatically. Uh, and so in many of these, you have corporate venture capital groups that have become very active, but even more so with some of these headline or later rounds, you're seeing mutual funds, uh, you're seeing, uh, hedge funds, you're seeing private equity players that are not traditionally, um, uh, engaging, uh, with these startups and, and with these pre IPO companies. So it's a changing dynamic. And so, um, An entrepreneur looking to see which VC to work with, uh, in the later rounds would probably be looking at the Rolodex and the experience and the, the, the working relationship between those VCs and, and some of these, some of these third part…

AI assessment note: “looking at the Rolodex and the experience and the, the, the working relationship”

Q And has that led to institutional investors giving more money to this asset class?

A In many cases, yes, and a lot of them find it particularly attractive right now. Um, and yet, in some cases, a lot of the money's in the hands of very, very large institutions that can no longer put money into a 20 or 30 or forty million dollar venture fund. They just don't have, they, they just can't divide it up in that small a parcel. So, uh, yes, it's still an attractive place for many of them to invest. Uh, and in many cases, uh, it's, it's, it's, uh, you know, fairly large chunks of money in large parts of their allocation. Um, That they put in. In terms of the actual arrangements, ah, it varies. Each, each venture fund and its group of investors, as it puts a fund together, negotiates the terms and the, the, the conditions and everything. Many funds, ah, charge roughly two percent for management fees, and that's the cost of the staff and keeping the doors open and sourcing deals and, and, and providing the talent to manage the money. Uh, that's, that's not unusual, the, the two percent, and typically, uh, the VC makes its money, the, the, his or her money, uh, on sharing a portion of the capital gains with the, with the investors, and typically what they call 20% carry is, is, is what you see a lot. Some firms, it's a little bit more. Some firms, it's a little bit less, but the idea is, Is that the, the primary objective of the fund is for the investment made in the comp…

AI assessment note: “In many cases, yes, and a lot of them find it particularly attractive right now.”

Q And talking of VCs with experience, um, have we seen a rise or a decline, do we think, in VCs coming straight out of business schools and entering into the venture capital industry?

A Tough question to answer because many of the top business schools are now requiring that their people have four or five years of relevant or domain work experience. I, I think, I think it varies hugely. Um, you, you don't see a lot of folks going in directly from VC. You don't see a lot of folks coming out of business schools, even the top business schools, going directly into a VC for them to become a VC. If they had prior experience, if they had Say, uh, you know, before joining, before going to business school, they had a, you know, middle manager role in an Amgen or something, uh, something like that would, would, would obviously be different than someone just coming out, but, but the experience and the Rolodex are, are going to drive that decision. I think also you have to look at where venture is, and over the past four or five years, we, we've seen a reduction in the number of firms, a slight reduction in the amount of capital available, but A significant, uh, uh, 30% reduction in the number of firms out there, uh, which says that, that, that a lot of the, the capital's being concentrated, uh, by larger firms, and in many cases, experienced hands. So, uh, the, unfortunately, the help wanted, uh, section of VC weekly, if there were to be such a thing, would not be terribly robust at the moment.

AI assessment note: “You don't see a lot of folks coming out of business schools, even the top”

Q I'm switching sides of the table slightly now. What do you think VCs look for when investing?

A Well, yeah, well, I, I think it's, it's all on the upside. And, uh, you know, it used to be that VCs and companies would, would match up geographically, and you would go down the street to the venture capitalist down the street, uh, who is geographically close by. It's much more complex now, and it's much, much more sector specific. And, and, uh, and, and, Not a sector specific, but sub, sub, sub sector specific, and, and, um, there, there's, there's less dependence these days on geography, and more on specifically what the company will do, and so you even see some of the West Coast postal, uh, coastal firms making investments elsewhere, uh, maybe a university or government lab or something has an intriguing encryption or some kind of e-commerce technology. In some cases, that The firm, uh, the, the, say the coastal firm would make the investment directly. Other cases, uh, they'd be looking for someone on the ground that could, could, uh, actually get, uh, involved in it. So, uh, you know, that's a, so, so, you know, what is the upside? How does this play with my Rolodex and who I can bring into the company? How does this play with, um, Other portfolio companies that we have, and where we think the internet is going, and so forth. All of these are questions that are, that are being asked, and perhaps geography a little bit less. You also have VCs, frankly, having to meter their…

AI assessment note: “what is the upside? How does this play with my Rolodex”

Q So what do you think biotech has seen its opportunity where maybe others haven't?

A I, I think in the case of biotech, it's just been pent up demand. I think it's been, I think the, the, the public at that, you know, these things move in waves and, and the public was identifying with companies like Facebook and, and some of the, some of the things that maybe consumers use and touch every day. And that's just an easier sell, uh, on an IPO. But if you look at, if you go back to nine in the 19 nineties, And look at what percentage of the first fundings in the nineties ended up going public. It was 14%. So basically one in every seven companies that got a dime of venture financing, um, went public. Now, because it takes so long, it's very hard for us to know, um, you know, what the current crop of companies or even the crop of companies eight or 10 years ago, uh, what their outcome will be. But, um, my guess is it's going to be five Maybe six percent. It's just a much, much smaller number that, um, are, are able to get out. So, you know, with that, you have the changing expectations, uh, on the part of the entrepreneurs taking money, especially if they're going in position is that, that they're going to be a slam dunk to go public when, when they get to the right point.

AI assessment note: “in the case of biotech, it's just been pent up demand.”

Q And has that led to institutional investors giving more money to this asset class?

A In many cases, yes, and a lot of them find it particularly attractive right now. Um, and yet, in some cases, a lot of the money's in the hands of very, very large institutions that can no longer put money into a 20 or 30 or forty million dollar venture fund. They just don't have, they, they just can't divide it up in that small a parcel. So, uh, yes, it's still an attractive place for many of them to invest. Uh, and in many cases, uh, it's, it's, it's, uh, you know, fairly large chunks of money in large parts of their allocation. Um, That they put in. In terms of the actual arrangements, ah, it varies. Each, each venture fund and its group of investors, as it puts a fund together, negotiates the terms and the, the, the conditions and everything. Many funds, ah, charge roughly two percent for management fees, and that's the cost of the staff and keeping the doors open and sourcing deals and, and, and providing the talent to manage the money. Uh, that's, that's not unusual, the, the two percent, and typically, uh, the VC makes its money, the, the, his or her money, uh, on sharing a portion of the capital gains with the, with the investors, and typically what they call 20% carry is, is, is what you see a lot. Some firms, it's a little bit more. Some firms, it's a little bit less, but the idea is, Is that the, the primary objective of the fund is for the investment made in the comp…

AI assessment note: “In many cases, yes, and a lot of them find it particularly attractive right now.”

Q And can I ask, do you think a VC can really be, Be a VC and a fully-fledged active VC if they do engage in a lean VC method like Dave McClure's 500 Startups where they don't take board seats?

A Well, yeah, the short answer is there are different models, and typically a round of financing will involve a VC taking a board seat. Now, a lot of the rounds are syndicated, and at some point, The value added of the VC is the VC's expertise and Rolodex and experience, connections, everything else. So I don't see how you can get completely away from that, but, but there are firms out there that, that provide different levels of service, different levels of engagement. Uh, Andreessen Horowitz, for example, comes to mind. Uh, there are some other firms, including back in Boston and the East Coast, where they actually have A deep, uh, I'll call it a bench or a resource pool that's brought to bear on the companies, and, uh, that's part of the services provided by the venture capitalist as, as part of the, part of the investment, and part of ensuring that whatever span of control, however many board seats a VC can take, that that company has the, the best fighting chance of being successful.

AI assessment note: “Well, yeah, the short answer is there are different models”

Q And to prior investors in, in these very popular rounds, do they get pro rata conditions, or do they, do they not get any priority?

A All of this is negotiated round by round, and, and lots of times there is some kind of participation, but, but especially if you're talking about, ah, a very small, ah, early stage fund that was involved early on, sometimes it's very difficult for them to come back later on with the, with the, with the amount of capital that, that, that's needed, ah, so, so there's a dilution effect. And, and I, I'm not sure how you get around that. I, the short answer is I think it really depends upon the terms. And, uh, to the extent that those early investors are, are coming back into the later rounds, some may say, okay, look, you know, we, we're coming back in here. We know we need to put more money in. We may not be able to make our share, but if this whole journey works the way we think it's going to, we'll still come out in good shape. And, you know, that's something that, that an entrepreneur Entrepreneur looking for money should think about whether it's, whether it's the first institutional money, or whether they're going for a state grant, or whether they're looking to kickstart something, or go to an incubator, uh, or an accelerator for help early on. I, I think the question they have to ask is, what does the whole journey look like? Um, am I going to need ten million dollars to get to where I'm going? Am I going to need a hundred million? Um, you know, if, if, uh, you look at Uber,…

AI assessment note: “All of this is negotiated round by round, and, and lots of times there is”