VC Cliché of the Week

My partner Brad was the first person I heard use this cliche.  It’s a good one.

When a venture firm makes a lot of relatively passive investments it’s called "spray and pray".

I think there are two ways to approach the early stage venture business.

You can make a small number of investments and become actively involved in the development of the companies.

Or you can make a large number of investments and let others worry about the development of those companies.

Both models work. 

You cannot make a large number of investments and become actively involved in the development of the companies because there isn’t enough time for an experienced VC to do both well.

And you cannot make a small number of investments and let others worry about the development of those companies because your fund’s performance is too dependent on each investment to sit back and let others do the work.

The spray and pray model works particularly well in up markets like we are in right now.  It does not work well in down markets like we had in 2001-2003 because when there is hard work to be done and every company in your portfolio is in crisis mode, having lots of portfolio companies is a real problem.

I am a fan of the small number/active involvement approach and that is what we do at Union Square Ventures.  We plan to make four new investments per year.  We might do one more or one less depending on other circumstances, but that is our ideal investment pace.  Two deals per partner per year is a pretty well understood metric among venture firms who take the active involvement approach to the business.

There is another benefit to the small number/active involvement approach.  When you do have winners, the community (other VCs, entrepreneurs, employees, etc) knows that you and your firm were are part of the success and there is "franchise value" to your firm for that investment.

That doesn’t happen with the spray and pray approach.  When you spray and pray, your firm becomes more associated with access to capital and less associated with the other things a venture firm can bring to the table.

All that said, I think that spray and pray oriented firms can put up good returns and have done that over the years.  They benefit from both portfolio diversification and increased odds of being invested in the really big winners that don’t come very often.