Why the Most Successful VC Firms Keep Winning

In an industry built around investing large sums in uncertain ventures, the best companies seek out the best investors, and gains accumulate at the top. Part 3 in a series.

Originally Published on NewCo Shift.

Investing in software companies is inherently an uncertain activity. It’s called high risk, but highly uncertain is a better label. Yes, you’re taking a risk with money, but the real problem is the widely variant potential outcomes. If you invest in a restaurant, you are taking a risk but you will pretty much end up with a profitable restaurant, or lose your money. If you invest in a software company, you can go bankrupt, have a small but profitable company, sell for five times the money in, or end up with a world-spanning multi-billion dollar behemoth that turns everyone it touches into a millionaire. That dramatic range is why you can get a bank loan to start a restaurant but not a software company. It’s exactly why people invest in software, but also why it’s so difficult to do well.

There’s no proven method for managing that uncertainty. The most successful investors frequently get it massively wrong, and a playbook that worked perfectly in one circumstance falls flat on its face in so many others. Yet, even when they frequently make monumentally bad investments, the best investors keep delivering the best outcomes. If no one knows what separates the best from the rest, how can some firms or individuals keep winning?

Of course, many would disagree with my claim, they would say the best keep winning because they can tell a great company from a bad one, but if you look at the trends in venture capital you can see the industry as a whole has given up on a clear system, even if individuals still cling to deserving their greatness. Fantastically successful investor Paul Graham once said that he can be tricked by anyone who looks like Mark Zuckerberg. He’s since claimed that was a joke, but he built his empire by making more bets than anyone else, which is a strategy explicitly designed around the fact that he doesn’t actually know why some things succeed and others don’t. Disgraced investor Dave McClure started 500 Startups with the similar goal of just making lots of bets, rather than making any attempt at making “good” bets.

Even those who invest in venture capital firms have given up on knowing who’s best. Given a pot of money allocated to VC, limited partners will distribute it across many firms, knowing that they have to play many hands to get a winner. After all, the industry average return for venture funds is, ah, absolutely nothing. The winners win big, and the rest balance that out, so LPs need to put money in enough places to be confident they end up with the winners.

If no one knows the difference between the best and the worst, why do the winners usually keep winning?


Venture capital is all about access: Founders having access to capital, and investors having access to the best deals. If you’re a founder today and you have a choice between taking money from a top-tier firm that keeps delivering hits, or another firm you don’t know and who hasn’t done well, which do you take? Of course you take the best firm with the biggest network and most well-known brand name.

Similarly, if you’re an investor who’s helped take lots of companies public, how does your deal flow compare to those who are just starting out and who don’t have a reputation for building big companies? Of course the best companies come to you.

In other words, there’s an implicit matching algorithm, where companies that are obviously doing really well are able to work with what look like the best firms, and as a result they are able to reinforce each other’s success. The best firms look better because the best companies seek them out, and the best companies do better because they’re getting the chance to work with the best brands. (For all that I am skeptical of repeatable investment skill, I am a deep believer in the value of brands.)

Venture capital is defined by the asymmetric stresses pressed on investors and founders by the need for access; every entrepreneur stresses over how they’ll get access to capital, and every investor’s business model is built around managing deal flow. Entrepreneurs who already had a great outcome magically have no trouble raising huge amounts of money, and yesterday’s great investors have no trouble convincing today’s great companies to work with them.

This focus on access also helps to explain some of the churn the system experiences. If no one knows what makes a great company, how can the best investors always get access? They can’t. There are plenty of great companies that fail to get first-tier support early on. If they do raise money, then those who backed them end up looking like tomorrow’s geniuses, and the cycle starts over with them closer to the top.

This access-based sorting also helps to explain how the VC industry is so discriminatory. Less than 5% of investments go to women-led companies, and just having a woman founder ruins a team’s chance of getting funding , and the numbers are as bad for firms led by African Americans, for example. If we believed investors actually knew what they were doing, then we could only conclude that they were correct to exclude women and minorities from investments, that these founders just couldn’t build great companies.

Of course, the data clearly says otherwise: Founding teams with women on them significantly outperform male-only teams. Because investors don’t know how to pick a good company from a bad one, they are relying on access and reputation, and because they’ve never let women or minorities in before, they can’t now. Their “pattern matching” doesn’t hit here.

This matching algorithm that runs our industry is reliant on privilege and luck. Venture firms and founders are almost exclusively white men from expensive schools (with a huge proportion from just Stanford and Harvard), and if you were lucky enough to be an early employee at Facebook or Google (who have historically used the same sourcing requirements), then that’s a big leg up, too.

To be clear, I think some investors are much better than others, and entrepreneurs haven’t built huge, successful businesses out of sheer coincidence. It’s not that there’s no skill involved, or that the people who get so rich instead deserve nothing. It’s that skill is an over appreciated (and often small) part of what determined their success.

You will rarely find communities admitting that privilege and luck are what determine outcomes. Human nature itself has a deep aversion to accepting this. Instead, we do what humans have done forever: We develop myths.

Humans deeply believe that people get what they deserve, and deserve what they get, despite the evidence to the contrary. So many of our cultural biases are a story created to justify a reality we would like to perpetuate. For millennia we’ve been told that royalty was special, and that’s why they were in charge, when it was patently obvious that their ancestors were just the best and most ruthless at organizing enough troops to control a chunk of land. Genghis Khan was history’s greatest murderer, which enabled him to spawn kings and kingdoms that lasted for seven centuries, but you can bet his descendants didn’t use his skills at genocide as justification for their lofty positions.

Similarly, myths have grown around venture capital exist to explain the winners and losers. Somewhat like royalty, these myths help convince us that VC is more than privileged people using their positions to make lots of money. They must be winning because they deserve to win. Equivalently, people lose because they didn’t deserve to win. You could waste your life reading about how this founder got rich because they were smart and worked hard, or that investor succeeded because of their investment strategy, but you couldn’t consume a whole morning with the stories of equally smart founders who worked just as hard but went broke, or investors who applied that same strategy but somehow didn’t make it on the Midas list.

Thankfully, we’ve seen some really interesting experiments focused on eliminating access as a criteria for investing. Social Capital recently launched a programmatic investment algorithm, and Village Capital uses peer decision making between entrepreneurs. Backstage Capital was founded explicitly to invest in those who can’t get capital from the system as it exists today.

With these and related efforts, I’m optimistic that we can begin to peel back the myths about what makes a great investor, entrepreneur, or company, and instead begin building a more open market around investment and company creation. Only then can we hope to see venture capital include, enrich, and benefit all parts of the economy.

Venture Capital Is Ripe for Disruption

It’s time to develop new sources of capital for founders, to help them generate wealth through solving their customer problems without the massive failure rate. Part 7 in a series.

Originally published on NewCo Shift.

The venture capital world that funds the technology ecosystem appears to be specially designed to back the best founders working on the economy’s most important problems. This series has shown that it has instead evolved over time, with no higher purpose in mind than any other financial instrument.

This evolution is in many ways a strength, as by definition it is built on the successes of the past, but it leaves our ecosystem more blind than we realize. We can fear the fragility this engenders, but should instead see it as an opportunity to reach beyond its artificial limitations, to solve hidden or devalued problems. Technology funding’s demonstrated ability to change should give us confidence we can stretch it further, clearing new paths to success.

Wikipedia covers the history of venture capital better than I could, but it’s worth highlighting key epochs. The system as we know it was birthed by the windfalls from early funding wins, including DEC and Fairchild Semiconductor, so by definition there was no technology funding system in place at that point. Every deal involved people flying around the US collecting enough money to back a new venture.

These early big successes motivated a few people in the west to set up firms dedicated to funding technology companies — prior to this, the vast majority of American capital was in New York. Within a couple of decades, partially enabled by some regulatory changes in the US, there were enough firms around (including modern heavy hitters like Sequoia and Kleiner Perkins) that we had what felt like the first stable system, which of course led to over-investment and the first pull-back in the late 1980s.

What survived went on to fund the internet boom in the 90s, when a huge amount of wealth was created (and then destroyed) and this new ecosystem first made it into the public consciousness. Much of what we believe about venture capital comes from those days, but it was still changing quickly, with no seed funds, relatively small amounts of funding for software companies, and no obvious pattern of success.

Right now, the system looks dangerously stable. There are hundreds of seed and venture funds, all following the same playbook: Try to get their investments to the magic number of $1m in annual recurring revenue (ARR), raise an A round of funding, and keep on the funding train until you go public or go bust. There’s so much pattern matching going on that founders are contorting their companies to fit the funding schedule rather than discovering their destiny.

It’s important to recognize that this appearance of stability is a recent arrival. We might tell a story of how it’s a natural consequence of previous eras of success, but much of current best practice is cargo culting, copying the behaviors of the successful rather than understanding what made them work. If you step back even a little to gain perspective on the industry, you quickly see how much the system is still changing, and still needs to.

Don’t get me wrong: the system we have works. It is, essentially, functioning as intended, and any ideas or recommendations need to take into account not just what we dislike, but what makes it work. I hope this series has educated you somewhat both on how VC works, and why it works that way. As usual, when we dig deeper we find no villain at the heart of a web; we might not love venture capital, but it makes sense, and it works this way for good reason. And indeed, the system is working very well for a few people, and in the process is driving huge change in our economy and lives.

As much as the system of venture capital makes sense, we must ask: What sits outside? The industry generates money through positive feedback loops, but absence from the industry is merely an indication that something hasn’t worked, not that it can’t. What are we missing by doubling down on what we know, instead of exploring the unknown?

Investors are reliant on people near them, who resemble them, and who can absorb the weighty downsides of entrepreneurship. We’ve seen that investors don’t really know what separates great companies from bad in the early days, so they don’t strive to create the conditions necessary for gestation, and once a company is started, they do little for the winners and even less for those who fail. But don’t worry, all of this is hidden by the massive profits that the biggest winners generate for the top-performing investors, and the rest of the industry (while failing to meet its investment return goals) glides along in the afterglow.

(To think I was asked recently if I had become cynical about venture capital.)

It’s a funny thing. I grew up a communist (literally, on a commune) but have become a pretty big fan of well-regulated open markets (although they seem to exist only in theory; in practice we have lost the taste for effective regulation). A self-respecting capitalist can and should argue that this is a market, and it’s performing exactly as it should. I can hear it now: “Capitalism is inherently Darwinian, where evolution gives all prizes to the winners and the losers don’t live long enough to make it into the archeological records.”

It’s a fair point. Humanity can afford stretch goals like less collateral damage than the battle for life and death on the savannah, but we could ask for better even without that ideal. It took millions of years for nature to come up with the Dodo, only for it to promptly die off once it encountered outside species. How convinced are we that our apparently stable system is any more safe from an outside force?

The ultimate weakness in the Capitalist defense of venture capital is that for all the apparent competition we have a homogenous system. Shouldn’t we have multiple types of funding competing for the best companies and the best outcomes? That is, not competition between VCs who all work the same, but competition between different funding strategies?

Because there is no open market here. At best we have a dysfunctional oligopoly (is there any other kind?) with some churn at the top. For all the talk of disruption, everyone is trying to win by copying the winners, rather than seeking to disrupt them. The only people willing to step outside the current system are those who don’t have a choice because they aren’t allowed to succeed within it. Unsurprisingly, they find it challenging to compete not with another investor but with a whole system of funding.

As just one example, the most common barrier I hear to starting a new kind of venture capital is that the limited partners — that is, those who invest in the venture capital funds — would not be willing to support a new kind of capital. This is a perfect example of an ecosystem limitation, rather than a problem with individual players. I hear no argument that founders, employees, and customers don’t want competitive models; only that the source of capital would need to be educated, and that’s just too hard. Except… this whole industry is only a few decades old, and its creation required that same kind of education. Why should we expect a new kind of financing to be any easier to start, require any less systemic change, than the one we’re fighting against? And isn’t it ironic that an industry built on stories of disruption finds the idea just too hard for its own work?

That competition will show up eventually, though. We need it. There are too many software markets lying fallow, unfundable in the current model and thus deemed to be of no value. Someone will figure out how to finance those companies. And just as the first winners in venture were big winners indeed, the first few investors to step out of this world into a new one should make out like the oligarchs who laid the groundwork for our current world.

I’ve said before I don’t have the solution, but there are some market truths give me confidence there are better answers available:

  • The best way to make money is to hold high quality assets for a long time. If nothing else, Warren Buffett has demonstrated this is both the best way to make money and indefinitely scalable.
  • The majority of employment and wealth generation is provided by companies too small or too closely held to be public.
  • The steady state of good companies is cash-flow generation managed by long-term teams who take pride in their work. This is literally the entire history of for-profit enterprises. Any other solution must either fail or revert to this at some point. None of these realities show up in modern venture capital. Companies can’t run on venture capital forever (although try telling that to Uber), and do usually need to show a profit to be sustainable (I expect Amazon begs to differ), but the companies that do either of these are explicitly leaving the world of venture capital.

It’s unquestionable that the financing structure of venture capital is tied in to this separation from market principles. The risky software companies we build today are funded via a structure invented to support the risky ventures of the 19th century: whaling. Suddenly the term ‘venture’ in venture capital makes more sense, doesn’t it? (Tragically, even though it was the days of slavery, those whaling fleets had better representation in some ways than current tech companies, with up to 20% of their employees being African American. Wow.)

We’re using an incentive structure that works perfectly to support individual voyages that might last a couple of years. Is it any surprise it is not great at building companies that last for decades, or have a high survival rate? In fact, whaling had a better survival rate than current venture capital, with more than 80% of the fleet surviving, and delivered better returns (14% IRR on average, and 60% IRR for the best). The funding perfectly matched the ventures.

I should not need to say this, but whaling is unlike company building. It’s unrelated to developing a product, it has nothing to do with creating a new market. It’s inanity to expect a funding mechanism built for one would work as well for the others. The fact that it’s making some people rich, and it hits a jackpot once in a while, should not confuse us.

Venture capital’s apparent stability convinces me it’s at its most vulnerable. Instead of continuing to fund disruptors, I think it will itself be disrupted.

If you’re a founder given a choice between a firm that kills most of its customers and one with demonstrated success at creating long-running companies that generate wealth for everyone involved, why would you pick venture capital? The only reason you do today is because it’s your only option.

Founders want this competition right now. Some want to build Facebook, but most want to build a great company, help their customers by solving a critical problem, and hope to get rich along the way. They don’t want a lottery ticket; they want upward mobility, entrepreneurial fulfillment, and to feel like they made a difference. Unfortunately, low-probability gambling is all the venture world sells.

The new models will start at companies run by women and people of color, because they’re the ones shut out of the current system, but as they start to succeed, they will start to pressure to rest of venture capital, and we will see just how stable the system really is.

I have tried in this series to help you understand not just what venture capital is, but that what you love and hate about it are intrinsic to how it works. I hope this deeper knowledge will help you make higher quality decisions about how to involve yourself in this world. Even more so, I hope it convinces you to seek out, or even create, other ways of funding companies, other ways of building them.

It’s time for founders to have truly competitive options for funding. Let’s go make it happen.

Venture Capital Is Built on Serendipity

Software has the potential to increase productivity as much as electrification or steam power did, but its impact is stunted by its reliance on random interactions. Part 6 of a series.

Originally published on NewCo Shift.

The venture capital ecosystem bills itself as a meritocratic miasma of genius, with smart founders getting smart money from smart investors. In reality, there is an overwhelming reliance on privileged people bumping into each other at just the right time. This serendipity has spawned some great companies:

  • Warby Parker was started because someone in an elite graduate program lost an expensive pair of glasses.
  • Apple was started by a couple of guys who met at a hobbyist group in the computer heartland.
  • Google’s founders met when one of them gave a tour to the other when he arrived at Stanford for a CS graduate program.

But how many great problems are being ignored because we didn’t get that lucky alignment of particles?

The remodeling industry is a perfect example. It’s an 83 billion dollar market, yet it’s only now starting to see software solutions. The industry itself bemoans neglect by the software industry. The article linked above has some impressive stats about how much waste they experience:

“…studies suggest 30 percent of the construction process is re-work, 60 percent of labor is wasted, and only ten percent of losses are due to wasted materials”

Shouldn’t there be companies fighting tooth and nail over that market? Shouldn’t there be tons of solutions out there, spending money like Uber and Blue Apron are to acquire new customers and take a cut of the productivity gains?

Yet I’m in the late-stages of having a garage built at my house, and as far as I can tell software was only used during design, not actual production. One of the contractors we considered seemed to be an Excel wiz, but wasn’t using off-the-shelf software. How many months of productivity could have been added back into these teams’ lives if they had better tools? How much less disruption could I have experienced, and even, how much less could I have paid if my contractor could get three jobs done in this time because she was so much more productive?

(Did you notice that even I’m relying on the serendipity of my building a garage to illustrate my point that VC relies too much on it?)

In a rational world, every reasonably sized market would have a well-funded ecosystem of software companies vying to take it into the information age. When I got my home equity loan for the garage, I should have been inundated with offers from software companies to help improve the project. Heck, someone should have offered me the loan interest-free if only I required my contractor use their software. Instead, my project is late, costs me more, and makes less money for all the workers because it’s left out of the information technology revolution.

And that’s just one industry, chosen at coughrandomcough. What about all of the other industries the software kings have not yet anointed as worthy, filled with deeply skilled and energetic experts who aren’t lucky enough to run in the right circles, or live in the right zip codes?

Venture investors famously want passion for the problem they’re investing in solving, so much so that the companies also then demand that any employees also be passionate in turn. And we want our software companies started by developers, by product people, not by business analysts. Or carpenters.

So now to start a company you’ve got to have a software developer thrilled about and experienced in a problem, able to accept the risks that come with starting a company (e.g., health insurance and wage loss), who is living in or can move to San Francisco, and hopefully is a white dude who went to Harvard or Stanford. One way to look at that is how discriminatory it is, but another way is just how much you’re relying on everything lining up just right. It might be that you’ll find a Stanford-educated software developer who deeply cares about building houses and can take the leap into entrepreneurship. But what are the odds that that person has the right insight at the right time, and then can find the right people to partner with?

Twenty years in I’m still awed by the opportunity for software to connect, educate, and empower people, but I’m incredibly disappointed by how little of that opportunity we’re progressing against. I think our inappropriately slow revolution is in large part thanks to this reliance on randomness. We have got to get past this if we truly want to get the most out of software before the heat death of the universe (coming more quickly now with all the power being consumed to mine bitcoin). If we can build an environment that does not use serendipity as a crutch, I am convinced we can generate more great companies, and importantly these companies can cover a broader swathe of the economy, and be run by a more representative sample of the market.

Let’s look to biology to see how much of a difference shifting to a constructed environment can make. Living creatures are full of enzymes, which are basically proteins that speed up the rate of a reaction. These reactions are critical to the function of the organism, and without the enzymes speeding them up, life as we know it could not exist. (Conveniently, I did my senior thesis at Reed College on protein structure, so I’ve got some knowledge here.)

In most cases, the reaction that they catalyze (that is, cause to happen) would happen without the enzyme, but it would do so at a far slower rate. For instance, mammalian milk contains the sugar lactose. This sugar will break down in water into glucose and galactose of its own accord, but not quickly enough to digest all the lactose in milk you drink. Mammals have evolved the enzyme lactase, which causes this splitting of lactose into simpler sugars to happen much faster.

Enzymes are incredibly complex — lactase has 1927 amino acids in five separate groups, arranged in an amazing 3D structure:  A rendering of the structure of lactase This huge structure is all necessary to enable the protein to place a lactose molecule near a water molecule in exactly the right arrangement to ensure the reaction happens immediately, every time, instead of eventually, sometimes. For all this structure, the site where the reaction takes place is quite small, just big enough for the two target molecules. Those 1927 amino acids mean the protein is about 37,000 atoms. Lactose is 35 atoms, and water is, ah, 3.

That’s a lot like designing a building the size of a sports stadium just to catalyze a meeting of two people.

How much quicker does the enzyme work? About 75% the world’s human population is lactose intolerant, meaning that if they drink milk as an adult, the lactose will cause adverse reactions instead of safely being broken down in the intestines. The rest express enough lactase that they are able to comfortably metabolize lactose, and thus can drink as much milk as they want. Again, remember that lactose breaks down in water on its own, just too slowly to be useful.

So here we have a situation where one of the major sources of calories around the world — cow’s milk — is enabled by this enzyme dramatically speeding up reaction rate.

What does this have to do with venture capital?

Again, venture today is heavily reliant on serendipity; that is, the right people bumping into each other at the right time in the right context. This is exactly how chemical reactions happen normally: Two molecules (e.g., lactose and water) live near each other, and every so often they bump into each other in a way that enables the reaction to happen. Most of the time, however, they fail to hit exactly the right setup, and nothing happens.

When the enzyme is present, though, its unbelievably complex structure ensures that the water and lactose molecules are placed into exactly the right orientation every time, and bam, magic happens.

The probability of a great company getting founded today is a lot like the probability of lactose degrading naturally: It happens, but slowly and infrequently.

I smile at the idea of complexes the size of sports stadiums built for speed-dating founding teams, but that’s not necessarily what I’m recommending here (although if that’s your plan, I’d love to consult on the project).

Even if we wanted to, I don’t think we could build a structure (physical or otherwise) like this, because we don’t yet understand yet what it takes to build a great software company, which means we can’t construct or evolve a perfect environment in which to make it happen.

All I really know is that what we’re doing now isn’t working. We’re not attacking the right markets, we’re not including enough people, and we’re not having a big enough impact on the economy.

For our ecosystem to be healthy, for it to be effective at transforming the industries that need it most, it has to do something differently. We can really only increase the rate of great company creation by increasing the rate of experimentation, or increasing the rate of success. Incubators and early stage investors are doing what they can to run more attempts in parallel, somewhat like a generative algorithm, but this is bound to have little impact because the goals — “be worth a billion dollars” — are so separate from the founding event. Investors are starting to figure this out and pull efforts back accordingly.

That leaves us the challenge of finding ways to increase the rate of success.

Of course, I have my own ideas for doing so, but I was always told as a leader my job was to present the challenge to the team and leave the problem of solving it to them.

Consider yourself challenged.

Moving Beyond Silicon Valley Software Companies

We need a new financing model to build new, better companies. Part 1 of a series.

Originally published on NewCo Shift

Two decades into a software career, I’m still moved by its potential to improve people’s lives through connection, automation, and access to information, yet I’m less convinced than ever that our financial systems are built to get the most out of it.

This is the first post in a series I’ll be writing on the structural problems in venture capital. These problems aren’t a condemnation of the industry, they’re an attempt to outline where the industry fails the market. This failure helps to explain people’s experiences, but I think also helps to outline the opportunity and need for other ways of funding companies. These ways will also have flaws - they’ll likely not be great at building unicorns - but they’ll be finding people and markets ignored by the current environment.

Like the general financial industry, the world of venture capital has become adept at using money to create more money, but it does not consider of the wisdom of its actions. It chooses easy answers, thus leaving harder but better questions unexplored, and accepts high collateral damage to the employees, customers, and industry that at best is painful and at worst is pure exploitation.

I am pulled to build more software that, like Puppet, helps people get higher quality work done in less time and with more joy. But that kind of utopian phrasing is used by every company in silicon valley, whether they do advertising arbitrage or sell you pet food, all while asking their workers to work crushing hours for lottery pay, no safety net, and 19th century ideas of labor force participation. The devaluing of women and minorities as either workers or buyers is both discriminatory and bad business. It’s true I’ve heard no overt support for child labor, but I expect that’s mostly because kids don’t have CS degrees from Stanford or Harvard.

I believe it is possible to design a kind of financing vehicle that is less subject to these flaws. There is a lot of money to be made in enabling the whole market to participate in the technology economy, and given that productivity has stalled since 2004 (coincidentally around the time that social networks and attention-seeking advertising-driven business models took over), there’s a lot of opportunity to deliver value by increasing productivity.

The major concern about increasing productivity is that it generally means fewer jobs, and the lowest-skilled workers tend to be first and hardest hit. I do actually believe in reeducation and the movement of labor to new opportunities, but you can’t ignore the trauma of career changes and industry churn. My work at Puppet showed that empowering people at the front line is how you drive both change and value. Too many industries focus on getting rid of the experts at the coal face, when instead they should look to elevate them. This would improve productivity while developing careers, instead of destroying them.

Unfortunately, venture capital is structured to require trauma to everyone involved except the investors. Too often, even the limited partners who are the source of capital suffer, with only a few firms delivering the kind of returns that the asset class purports to offer. The industry is built around making many bets and expecting most to fail. Even worse, every company who wants to participate must make a claim to be able to reach these heights, even if they don’t believe it, and then they must risk their own death attempting to keep that promise.

The model itself requires that companies either go public or kill themselves. Nothing else fits in the spreadsheets. Again, this guarantees trauma to nearly everyone involved - even the ones who make it out suffer the whole way, leaving a trail of burned out employees and failed customers.

I think there are amazing companies waiting to be created that can deliver life-changing benefits but can realistically “only” generate $30m, or $50m, a year in revenue. At 25% margins for software, these can be huge sources of profit, but a venture capitalist would derisively call that a lifestyle business and either not fund it, or force it to kill itself in an attempt to scale beyond its natural size. These can be great businesses, but because business funding generally fits into either conservative bank loans, or 10x-oriented venture capital, there’s no model today that respects them. Jason Fried and DHH at Basecamp have done a ton of great writing on this.

Jennifer Brandel, Mara Zapeda and others have launched the Zebra movement, focused on helping founders shut out of the VC world start companies that enrich themselves and their communities rather than their investors. I think this is an awesome effort, and has been an inspiration to me.

It’s true that this kind of company could not have as high a failure rate as venture capital does, but, ah, that’s not exactly complicated. I mean, VC literally requires failures of most of their companies, so I’ve got a nice anti-pattern to work against. There are well-worn practices for improving operations, people, and efficiency at even young businesses, but VCs haven’t bothered to invest in any of them, because again, they expect most everyone they work with to fail. Vista Equity, among many others, has shown that being more than dumb money can be more than just talk.

You might say there aren’t enough entrepreneurs out there, and all the great ones are focused on building unicorns in silicon valley. I say phooey. Tell that to the millions of people who start restaurants, corner shops, and franchises around the US. Frankly, tell that to all the people who pitched the valley but weren’t white men, or couldn’t afford to live in the bay area, and thus could not get funded. Because the valley itself refuses to believe great entrepreneurs can be women of color, or uneducated, or have a humanities degree, there is a long waiting list of great people ready to be given a little money and a little trust.

Silicon Valley today is baseball before Jackie Robinson, golf before Vijay Singh and Tiger Woods, tennis before Arthur Ashe and the Williams sisters. It’s the World Series with only North American teams, the World Championship game with only American athletes. It might do great things and be a great spectacle, but it’s weak sauce, because you know you’re not really competing with the best. In fact, you’ve structurally guaranteed you won’t, with all your stories of pipeline problems, lowering the bar, and various other grandfather clauses.

I do not believe in the primacy of ideas. I do not believe great entrepreneurs are in short supply. I do not believe we will run out of awesome opportunities in software in my lifetime.

I want to collect funding that will enable those unsupported entrepreneurs to reveal and develop their greatness, I want to build software companies in spaces that currently have no software, and I want to generate great returns for everyone involved without hemorrhaging people and money.

Yes, I know that means I have to find a different way to deliver returns to investors, because I don’t want my portfolio companies to have to sell. Yes, I know that means I will be creating a new asset class, with all the complications that entails around convincing LPs to invest in it.

The fact that others dismiss it out of hand for being impractical is exactly what excites me about it.

Please follow along in the rest of my series as I delve into the individual structural flaws in venture capital that I think outline what a competitive funding instrument must find a way around.

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