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Innovation in Venture Capital

I met recently with an entrepreneur who used to work in venture capital.  One question I asked him was, “Why quit venture capital and go back to the grind.  I always felt like venture capital gave you the high level fun of dabbling in companies and working on their worst problems, similar upside, and lower beta!”

His answer was, “I found that venture capital was largely a financial exercise and I just wasn’t a finance guy.  I kept spending all my time working with portfolio companies on their problems and getting in really deep and finally I realized I just needed my own company.”  He went on to tell me (and I hope I am not perverting his explanation to much) that he found VC to not be innovation, it was mostly meet with tons of companies and write a few checks and he was interested in something else.

I thought this was interesting and immediately thought about First Round Capital and Andreesen Horowitz.  Why?  Here is why:

They are innovating.  They are changing the way capital gets attracted.  They have taken the “Keiretsu” idea that KPCB pushed so hard in the 90’s to the next level with a variety of tremendous innovations in the way that an investor supports their entrepreneurs.  As Josh, founder of First Round, pointed out in a recent post:

  • Portfolio subject-specific conferences (I remember they did a tele-conference on javascript architectures)
  • Road shows (I remember they did a bus tour dragging their portfolio around to big ad agencies)
  • The Exchange Fund (A competing VC recently said, “This won’t actually move anyones needle”, but the perception of helping entrepreneurs lower their beta is huge)

These guys are finding ways to innovate in venture capital.  Maybe it was that they all started their own fund without working for a VC.  They had a framework to innovate from: experiences as entrepreneurs but not as VCs allowed them to “not play by the rules”.  This guy I was talking to went to a traditional VC and because he was the new guy, maybe he didn’t have the empowerment to innovate.

Clearly, great entrepreneurs find places to innovate in even the most staid and traditional markets.  While I am no historian, VC had probably not really changed significantly in decades prior to the 21st century.  Now we are seeing an incredible market change.  Fun to sit in the bleachers and cheer!

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