VC Cliche of the Week

This week’s cliche is one I hadn’t heard until we went out to raise money for our new firm, Union Square Ventures, last year.  It’s a cliche more common among limited partners (LPs) who invest in venture funds than among the VCs themselves.

But its used to talk about an important topic.  When VCs, who’ve done well with a particular style of investing, start to adopt a new style, the LPs call it style drift.  And it’s not a compliment.

I know style drift as I’ve done some drifting myself.  And I agree with the LPs, its not a good thing.

I spent almost 10 years doing early stage technology venture capital at Euclid Partners and did very well with that style of investing.  In 1996, I formed Flatiron Partners with Jerry Colonna  We raised $150mm and decided to focus on early stage technology deals with an emphasis on the Internet which was just emerging as an investable theme at that time.  For the next two and half years, we did nothing but early stage deals and had great success with our approach.  It was possibly one of the all time best periods to be making early stage investments and we benefited as did everyone else in the early stage venture capital business.

In late 1998/early 1999, we got a much larger commitment from Chase Capital Partners which was our financial partner.  This time we committed to invest $500mm.  We decided to broaden the scope of what we were doing.  We staffed up from the two of us plus an admin to almost 25 people.  We went multi-stage.  We did much bigger deals, sometimes as much as $10mm on the first round.  We invested in hardware and mobile technology, two areas we hadn’t had prior success or experience investing in.

The results were predictably poor.  With a lot of work in the 2001 to 2004 period, we’ve been able to turn that portfolio around and will most likely produce a decent return on our 1999/2000 investments.  But style drift wasn’t a good thing for us and its generally not a good thing for any investor.

When we formed Union Square Ventures in 2003, Brad and I decided to avoid style drift at all costs.  We invest in early stage opportunities in the applied technology sector.  That’s all we do and as much as we’d love to profit from China or energy or something else, we won’t do it.

We are in a period of intense competition in the financial markets.  That is not limited to venture capital.  It’s true in buyouts, hedge funds, real estate, even international markets.

The best way to make money in these super competitive times is to find a sector and a style that distinguishes you from your competition, stake it out, and make it your own.  Be the best of breed in that specific style.  And stick to it, even when the market moves away from you for the time being.

Because consistency and focus are rewarded over time.  Chasing the style of the moment is not.

So if you are a venture investor, its best to avoid style drift.