My partner Andy Weissman did a fireside chat in Toronto a few weeks ago at the offices of our portfolio company Figure 1. This is a long video, almost an hour long, but there are a lot of gems in here.
I was there 🙂 I liked “Our blogs are a conversation with the world.”https://twitter.com/wmougay…
The one surprise of VC firms is that the managing partners can be successful without having skin in the game. Charlie Munger doesn’t err too often.
I think most members of VC firms have skin in the game, no?
Skin, in finance, is when you loose money on the downside. When, in the case of negative ROI, you personally walk away with less than you started with. That’s not the case for most VC managing partners/associates.ps have you blogged recently on VHX?
When you personally walk away with less than you started with.However even by that metric the parties differ on the skin damage. Sure someone who has millions and loses $100,000 has skin in the game. But losing that doesn’t hurt anywhere near as much as the person who loses $100,000 that only had $100,000 (or $200,000 you get the point..)That is one way the rich are able to get richer. They can afford to put skin in many games (take gambles) without impacting their total financial health.
This may be the case for limited partners but not necessarily managing partners.
Are you claiming that managing partners “bet the ranch” with their investments relative to their total financial health? Surely they are not that stupid.  Of course I’ve heard of that happening with real estate developers and small business people who have to sign personally of course..
I think Charlie Munger did? I’m not suggesting anything I’m just pointing out that the great Charlie Monger argued that any investor worth investing has skin in the game.
.Before anybody starts mumbling about “skin in the game” you have to note that VCs are getting paid to manage their OPM funds. 2% annually on $500MM is not chicken feed.Over 10 years this is a 20% override on the OPM! That is not chickenfeed either.If they really had skin in the game, they’d invest 15% and be co-investors, calculate their gains/losses on a fund basis, and forego their management fee.I am NOT suggesting they should or that it is a test of fairness. It is a very good investment structure and scheme.JLMwww.themusingsofthebigredca…
Additionally I think the stress of being small VC firm comes not from having money on the line but having your reputation on the line in terms of where the next big hit is going to come from. This is particularly difficult given the time frame of investments and the amount of investments a small firm can even make. And a larger firm with 5 times the partners (in theory) has a much greater chance of hitting a big win which not only provides financial rewards but also PR and accolades in the press (which drives marketing). What’s different from other businesses is that this is not as formulaic. For example if you’ve already figured out how to build an office building or a housing development (or a chain restaurant) you can more easily apply that formula again and again (I am not taking about mega developments which take decades but smaller projects) and so you can both remain relevant and make a nice living from doing that. VC is not knowing if and even when the next hit will come from. That’s actually a great deal of stress (so you have a large amount of mental skin in the game let’s call it).Agree?VC is not European ground war.
From all I can see, there is not a single information technology (IT) VC firm in the US that makes an actual, serious effort at finding “the next hit”. The situation does appear to be quite different for the biotech VC firms.Instead, if an IT VC firms stumbles onto another Facebook, Google, Microsoft, terrific, but they see no way to do that better than throwing darts.Instead, the IT VCs just go along with the flow within the parameters approved by their LPs and hope for a good M&A here, a booming IPO market there, an acquihire someplace, and day by day enjoy their 2%. The usual averages, say, from Kauffmanhttp://www.kauffman.org/new…and AVChttp://www.avc.com/a_vc/201…show that on average the IT VCs make a little money, not much but a little.The idea that there could be a better way sounds to the IT VCs and especially to their LPs as just an attempt to pick their pockets.The first gap is the ability of the VCs and LPs to understand that it is possible to evaluate, usually quite accurately, IT projects in the STEM fields. The next gap is that the VCs are nearly all non-technical, and nearly none of them have the STEM field background needed to evaluate IT STEM field projects or even direct others to evaluate such projects.To the extent IT VCs evaluate projects at all, they evaluate just the user interface/experience — UI/UX. So, they assume that the rest is routine and irrelevant.NSF, NIH, DARPA, Intel, HP, GE, and more do well evaluating ambitious STEM field projects, commonly in IT, and long Bell Labs did much better, still, but the LP/VC community wants nothing to do with such things. Instead the LPs behind the IT VCs are closer to commercial bankers and private equity people.Of course, the flip side of this can be an opportunity — no competition. And with the prices of infrastructure needed for an IT project continuing to fall rapidly, equity funding is becoming less important, thus, increasing the opportunity. E.g., want a simple computer? Okay, get a stick, a wireless keyboard and mouse, and a USB/Ethernet converter to connect to a cable modem for Internet access, use USB to connect to, say, hard drives, plug the stick into the back of a TV set, and run Windows 10, etc. For more, what can be set up for less than $2000, oops, today’s prices, call that $1500, maybe $1000, is amazing. “Look, Ma! All without equity funding!”
I am under the impression that most VC “partners” are also investors in their own funds (ie, LPs) and thus have said skin in the game
Andy is the ‘cowbell’ of USV! We can always use a little more cowbell! 😉
Such an apt description!
I give Andy a lot of credit for being so upbeat and such a great engaging speaker. I randomly skipped forward to the part about Harry Potter tatoos “isn’t that great!” and Andy is able to remain enthusiastic even as the reporter showed no emotion at all. Kind of dolt like. That’s not easy to do without that visual feedback. Noting by the way that this video is “unlisted” on youtube for some reason.https://youtu.be/LtM4PmosE5…
I agree that Andy is upbeat and an engaging speaker. Even after learning from Fred for 12 years (or is it 12,000?) I learned a lot about the business and the firm from Andy in this video. Reflecting now on how to turn it into action in my own endeavors.
“GENIUS hides in plain sight,” Andy, LOL.
There are times when an hour can feel like a whole day. This was not one of those hours. It flew.