I spent a terrific couple of days in Boston last week at one of our semi-annual gatherings of partners from the 16 early stage venture funds across the country that are affiliated with Village Ventures. These meetings – and I’ve been to 20 of them in the last 10 years – are consistently high quality events, and provide valuable impetus to step away from the office and the regular patterns of weekly life to actually think about things for a bit. Last week was no different.
There were a number of sessions that really got me thinking, so I figured I’d jot down and share thoughts from a few of them.
After a brief welcome from VV Managing Partner Matt Harris on the morning of day 1 we were “treated” to a session on board governance, fiduciary duty, and how to keep yourself from getting into trouble as an investor director on an early stage company board. Not exactly the most fun topic in the world, but the folks at Pierce Atwood did a terrific job of keeping it real, relevant, and engaging.
The short summary is that being a director is, as we know, a serious responsibility. And being an investor director creates particular challenges and potential conflicts as we work to balance our dual roles as investors – with obligations to maximize the value of our share holdings, and as board members – with a responsiblity to all shareholders. Tricky stuff, and very important to be thoughtful about. Not surprisingly, the trickiest territory here is generally around bad news situations, where the preferred stock that venture investors generally purchase is in a position to be exercising its liquidation preference at the expense of other shareholders.
I walked away from this pondering one question in particular, about which we had had some fruitful discussion: Do VCs really need board seats? There’s certainly a lot of downside to being a director – exposure to all manner of litigation being the primary issue. What if we were to forgo board seats in favor of documented rights to serve as observers in board meetings? After all, it’s being privy to the information and having a voice in the discussions that really matters. Surely the combination of the moral suasion that comes from being a check-writer and the control provisions that are present in most every venture deal are where the bulk of our influence formally originates. Maybe we’d all be better off if we left the board exposure to others and spent our time more freely operating as non-fiduciarily bound advisors? It’s worth thinking about.
This governance discussion was followed by a real treat of a special guest. Gina Raimondo is the Treasurer of the State of Rhode Island, and used to be a peer of ours in the VV Network, having been an early VV employee and then working as a partner at Point Judith Capital. She ran for state office last year and won convincingly. If you’re not already aware of the amazing work she’s doing to overhaul Rhode Island’s busted state pension system, read this WSJ profile from the summer. We should find out this week if Gina is successful. If she is, little Rhode Island will offer a model for how to reform the dozens of other broken pension systems across the nation. These challenges are not widely enough discussed, but could have crippling impact on our state economies. It is so inspiring to see an old friend leading the charge.
Gina was followed by the Main Event, a 90 minute fireside chat with Fred Wilson of Union Square Ventures, interviewed/facilitated by Fortune’s Dan Primack. This was technically an off the record conversation, so I’ll respect Fred’s wishes by not sharing too many details. But one key takeaway: Fred reminded us all that he didn’t become the Tom Brady of venture capital overnight. He’s been at this game for over 25 years now, and had been at it for nearly 20 before founding Union Square Ventures in 2003. He took an awful lot of lumps along the way, and could probably be described better by Malcolm Gladwell’s Outliers framework than by assuming he is some Tiger Woods-esque prodigal savant. Or at least that’s what I’ll choose to focus on – gives me some hope that with another dozen years in the business I might get good at it! Regardless, a real pleasure to have the time with Fred, the man who built the firm that, with its innagural fund, was the first investor in both Twitter and Zynga, amongst others, and now has a very good chance to become the single best performing venture fund in history.
The downer of the conference was without question the discussion of the fundraising landscape for venture firms. As if we needed it, we had a collection of institutional venture capital Limited Partners to give us the confirmation. In short, it’s abysmal out there, with no reason to believe its going to get better anytime soon. State pensions like Gina’s are rapidly shifting asset allocation models away from venture, as are large university endowments, as they increase focus on liquidity and decrease risk tolerance. VC funds-of-funds are struggling to raise their own capital. Banks and other large financial institutions are almost entirely out of the game post-financial crisis. Go to a gathering of Limited Partners and you’ll struggle to find anyone who’s not making a risk-adjusted-returns oriented shift away from venture.
Ian Sigalow offered some good perspective on this last week. Bottom line, all but a very fortunate handful of VCs have some reason to fear for their (our!) job security in the medium term. Is that a bad thing? Not necessarily. The industry has gotten a bit crowded again, and I’ve always been a fan of creative destruction. However, I worry about the speed and efficiency by which market forces will adjust in this case. Like many, I suspect we are headed for a medium term that involves a substantial continued shrinking of the venture industry and a resulting decrease in support for entrepreneurial activity. We’ll get through it, no doubt. Such a change will surely create opportunity, which will result in outsized returns and then a flood of funds back into the asset class. But it’s going to be bumpy for awhile. And in a macro climate where innovation and job creation are certainly in everyone’s interest, we as an industry are not going to be able to do quite as much as I wish we could.
The final session of note was a conversation with Dave Balter, founder/CEO of BuzzAgent, one of the early leaders in the Word of Mouth (WOM) marketing space. Dave is a terrific entrepreneur, and the BuzzAgent story is important for its lows as much as for its highs. Dave’s candor about the company’s meteoric rise, rapid fall, and his struggles to stabilize the company and reposition it were reflective and thought provoking. The conversation served as a compelling reminder that we have as much or more to learn from our struggles as from our successes.
All in all, a terrific couple of days. And always a real pleasure to be around my friends and colleagues from across the VV Network. As with most such gatherings of peers, it was the dinner and cocktail conversations that offered the most valuable content. This is a hard business, and at times a very lonely one. Having a network of likeminded soldiers fighting similar fights has always been invaluable to me. I’m looking forward to our spring 2012 gathering already.
Can I Buy A Vowel? 
RE a difficult fundraising environment for VC’s – do you think this means VC’s (particularly smaller firms) will be looking at alternative sources of funding? For example, I know someone who is about to sell their business for something like 6-8 MM. He wants to invest the proceeds but does not want to put it on the street – would a smaller VC be interested in a partner in the $1-2 million range?
Yes, VCs are definitely looking for other funding sources, and i suspect high net worth individuals and family offices will be a much more important part of the mix going forward. Your friend would no doubt have been very popular at the Village Ventures event last week!
Very interesting. Sounds like the VW network is very valuable. Sobering reminder of the LP environment. We raised our 2nd fund in late 2010. Hoping for a twitter of our own to ease the fundraising process.