Ten things I learned about venture capital in twenty-four years of trying to do it

Today we announced the closing of our sixth fund at $400MM and after twenty-four years in venture I just signed for at least another ten. You can only succeed in this business if you are always learning, and here is what I have learned so far:

1. Venture Capital is hard

All investing is hard, because the market, as the investor Ken Fisher says, is the Great Humiliator. Venture capital is harder than most. There are 12MM small businesses in the US with more than one employee but less than one hundred employees. Most will stay small. The venture capital job is to pick from that 12MM companies the rare company that can grow to a 1,000 or even 10,000 employees, go public and remake an industry. Identifying an entrepreneur, an idea and a company with that potential is not an easy task.

2. Now is not an easy time

I am often asked by investors “where we are in the cycle” and the only honest answer is, who the hell knows? If I could call the cycle with certainty I would stay at home and trade S&P futures in my pjs. What I do know is that when it is an easy time to raise money, it is often a harder time to make money and vice versa. Right now, capital is not scarce and that is clearly a warning sign.

3. Tech innovation beats a bad business cycle

Market conditions, overall valuations levels, capital availability, exit conditions, all these things are outside our control as a firm. We have to be aware of them and take them into account but we do not have to be driven by them. The beauty of investing in innovative high growth technology companies is that cyclical forces mute but cannot stop disruptive change. Put more simply, great companies power through. Invest in great companies, fund them through good and bad times alike, and everything else will work out.

4. Great companies are always out there

I worry about a lot of things, but one thing I do not worry about is the continued pace of innovation and the opportunity to build great companies. Technology in general has been the primary driver of growth since the Industrial Revolution, and information technology since at least 1960. Absent evidence to the contrary, I am willing to believe it will not stop now. I am not a fan of the “now is the best time ever” to build a company school of hyperbole, instead I take the view that it is always good time to build a great company and it is never a good time to build a mediocre one.

5. Be very good at something, not kind of good at everything

Erasmus was apparently the last person who knew everything and Erasmus is dead. No venture firm can be good at everything and so the key is to be explicit about what in fact you are good and make sure that what you claim is real. At ScaleVP we focus by industry. Our companies sell software (and sometimes hardware) to businesses large and small. We also focus by stage. We invest in companies once they have product market fit and are looking to scale. The typical company we invest in has low single digit millions of ARR and is growing rapidly, adding go-to-market (GTM) expertise to an organization that was just product focused. This is the risk we underwrite and all our efforts are geared to helping our companies manage this transition.

Focus has a real cost, there are deals we see that we do not and markets we do not play in, but the payoff is worth it. Simply put, it has allowed us to succeed and make money for our investors, something that three bear markets in twenty plus years has taught me not to take for granted.

6. Change is not the opposite of focus

To invest well you need a worldview, a perspective on where technology is going. That perspective can often serve you for a long period of time, but eventually it has to change. We are seeing one of those changes right now.

The major technology trend for the past twenty years has been the platform shift to the cloud. That move is not yet complete but today cloud software is a crowded, competitive and fast maturing market. A new SaaS company today is probably competing against a SaaS incumbent and it better have a better product, a different monetization model, or a more modern take on a business workflow to have a chance. There are still untapped verticals and markets but much of the ground has been taken.

The big story for the next twenty years will be about the addition of meaningful elements of artificial intelligence to make cloud software and the humans that use it, more productive. We now believe that moving applications to the cloud will, in retrospect, seem only the first step towards enabling those applications to become more intelligent. In simple math terms, it is not Cloud + AI but rather Cloud x AI, with the cloud being the infrastructure that enables AI to finally achieve its potential.

7. Ignore the noise and do what works for you

We are cognizant of the changes in the venture environment. We see the bigger rounds, the bigger funds and the growth in the number of investment partners. We wish all these players success, but for our firm, we do not feel the need to do anything radical. We have grown the fund size just under 20% from Fund V, we have grown the team by promoting Alex Niehenke to Partner and adding a second principal, but that is plenty of growth for us now. One of the great truths in investing is that you don’t have to do every great deal, you just have to ensure that every deal you do is great. That alone is hard enough.

8. Decisions are the real venture product

The core product every venture firm makes is decisions. We make 1,000 decisions a year, 990+nos and at most six to eight yeses. Making those decisions, and picking correctly is at the heart of what we have to do. Our decision making process appears to be working, and our number one goal is not to let hubris cause that to change. To that end I remind myself everyday that I am not as smart as I seem in 2018 and hopefully not as dumb as I seemed in 2001. Humility helps avoid humiliation.

9. Actual fallible people have to make those decisions

If decision making is the core venture product, people who can disagree with each other, contradict each other and still work together are the core ingredient that makes that possible. Just scan the academic literature on decision making to see how hard group decision making really is. Thank you to all my partners, for shooting down my dumb ideas, while leaving my ego somewhat intact, and for taking my comments on your deals with the proverbial grain of salt. Thank you for reminding me of the huge wins I have passed on but only doing so at carefully chosen moments. Being wrong hurts.

In particular thanks to my partner Kate Mitchell who is stepping back from a full time role at ScaleVP after twenty years to be an advisor. We would not be here without her, and I am sure that even as an advisor she will work more hours than I do.

10. Entrepreneurs are the heros

It should not need saying but the entrepreneur is the hero of this story. Venture investors have diversification, entrepreneurs are all in. We are the eggs, they are the bacon. I look at the talents of the people we have backed, people like Aaron Levie, Josh James, Scott Dorsey, Dan Springer, and many others. We are lucky to get to climb on board the train that they are driving.

Overall, venture capital is a great business. Being a venture investor is a great way to earn a living in an industry that for all its faults contributes hugely to what makes the US economy successful. The five most valuable companies in the United States are all technology companies, all were venture backed and three of the five of them were funded in the past twenty five years. A chance to be part of that industry is an amazing opportunity, and I try and remind myself every day how lucky I am. As Dylan Thomas said of writing poetry, I do it for the glory of god and the love my fellow man but mainly because I would be a damn fool if I didn’t. I feel the same about my job.

With thanks to our investors and entrepreneurs, a modicum of humility and a large dose of excitement I look forward to helping invest Fund VI.