As many of my readers know, I wrote a KPCB mea culpa that got quite a bit of play (not just in the press). Not in the least because my arguments highlighted a string of problems within the most prominent venture capital firm in Silicon Valley, responsible not just for slumping investor returns but more importantly, signals systemic issues in the way they arbitrage innovation.
The failures of the majority of venture firms destroy innovation at twice the impact and pace of their mistakes. For false positives prevent false negatives of innovation from succeeding and erode the integrity and trust in technology innovation at an alarming pace.
The reason why I will not give any venture firm an easy pass, therefore, is not just the dollars lost by idiot limited partners who deploy pancake economics and lose money as a result, but the more cultural severe destruction of the prime thesis of important innovative ideas, that should have been promoted instead.
And therefore KPCB, as the emperor of emperors in venture capital, deserves my particular attention.
The problems of KPCB, as I described in my previous blog, suggest systemic issues over the years, during which time frame it deployed its venture strategy with the utter determination and defiance only an Emperor of venture capital, under cover of 12-year time-delayed merit, can get away with.
Clearly, by KPCB’s recent admission, that past confidence did not pay off for its limited partners (as investors in KPCB). So, the question arises, with what kind of belief shall we pair its sudden newfound confidence?
We should all get second chances in life, and with great interest did I watch the video interviews Forbes published online with general partners John Doerr and Ted Schlein. Ted appears a friendly chap, seemingly dutifully repeating the talking points of KPCB’s new communications efforts, designed to get great entrepreneurs to reconsider them.
I cannot get over the smug and smirk on John Doerr’s face as he describes how venture capital is a long-term business, how he is blessed with limited partners who see it that way, and how the future of KPCB looks all too bright.
With that, John Doerr’s prior admission of guilt appears as sincere as Lance Armstrong’s, had he only added the proclamation that everyone else in venture capital made the same mistakes.
My bullshit barometer spiked when John mentioned what a long-term business venture capital is. It is clear that the endless horizon projected by “the fullness of time,” as once astoundingly written by the now-former investment manager of The Investment Fund for Foundations, has served as the outright comic relief by which clueless limited partners re-up with struggling venture capital firms.
The strange marriage between venture capital firms and limited partners is what signals the mediocrity of the venture capital business. It should not be.
Breaking it down again
Eat your own words
The somewhat humorous tone that is to follow should not distract from the close observation that the business of innovation cannot survive with venture firms, as innovation’s arbitrage, held to a much less stringent assignment of merit than entrepreneurs.
With that in mind, just imagine what would happen if the CEO of a KPCB portfolio company would tell the board what John suggests in his prior confession and the video interview. Do you think John would demonstrate the same leniency to a startup as limited partners have shown him?
Imagine the narrative from the portfolio-CEO to John to go somewhat like this:
John, I know my performance over the last 12-years isn’t what it should have been, but I am coming to Jesus. Forget I have made some terrible choices. From now on, I will work my butt off. I will keep deploying multiple business models but will focus more on the one that put us on the map, and I neglected, maybe. For that, I need more funds and deploy more people. Just remember that innovation is really a long-term business, and I am proud to have you as my venture capital investor, and your willingness to keep backing me.
No CEO of a startup company should survive a board meeting after having ushered the above narrative, and I am positive John as a board member would pull that plug quickly too. Venture firms should not be able to get away with those excuses either, yet unfortunately – and to the demise of innovation arbitrage – they do.
In the interview, John touts his actions of hiring more people (marketing communications, business development) into the KPCB fold to aid startups in becoming more successful. That all sounds great on the circuit of false positivity, but I have a feeling start-up companies will get a bill for the resources KPCB deploys as part of the deal, much like most start-ups get passed on the legal fees, of closing a venture round incurred by the venture firm, (usually) in excess of $25,000.
Worse is what this false positivity indicates, using the analogy of American Idol again, that the role of a judge is to find the best singer, not to teach singing.
The role of a venture firm is to find authentic alignment with entrepreneurs on foresight combined with their path and ability to execute. Put differently; you do not help your children succeed in life by getting a job for them.
The recently announced interest of KPCB in Google Glass (a neat experiment I might add), and its effort to drive and fund applications for the project, is as flawed as the premise of iFund, sFund and KPCB’s ignorance to fund Facebook described in the mea culpa.
The role of a venture firm is to invest in the platform, not in the highly corrosive and fragmented value of its content (with apps disguised as merely another type of content).
Compared to startup companies, venture firms have it extremely easy. For a start-up company, success ties to a singular purpose, of reaching a meaningful socio-economic value that allows them to scale quickly.
A venture firm deploys its risk differently, and by virtue of a portfolio-play to many companies at once. Some portfolio companies win, some lose, yet as long as the winnings wipe out the losses, all looks good to the limited partners as investors in venture capital, less frequently equal to winning the trust of the public.
But the risk mitigation of venture capital firms does not stop there.
Large established firms like KPCB have a network of stacked and parallel funds by which risk is endlessly mitigated. In the words of Tim Draper of venerable Draper Fischer Jurvetson (which does not appear to be doing any better) to “smooth out investor returns.” Then, large funds mitigate venture capital risk with private equity risk, through PIPES and other constructs. Then, pure technology plays to reduce different kinds of risks, such as risk innate to health care, green tech, etc. But it does not stop there, no less than ten levels of embedded diversification of risk (see The State of Venture Capital) constitutes the avoidance of risk that is supposed to chase the outliers of innovation. Good luck.
And so when a venture firm like KPCB fails to produce satisfactory returns, it proves that despite the ten levels of diversification of risk, charged with fleeting private placement memorandums, loosely coupled limited partners, and the most eclectic general partners the world has to offer, not the tactics John refers to need change, but its strategy.
Venture firms, like KPCB, fail regardless of their private placement thesis or their dark knight pedigree. They will continue to fail because the constructs by which they deploy risk are economically incompatible with finding outliers. The avoidance of risk cannot chase the returns promised by prime risk.
Time will change nothing, except make things worse. Crowd-funding and government-sponsored programs demonstrate the void venture capital has left behind. Fear of failure has turned many venture firms away from their supposed core competency, leaving them with nothing but the dependencies on, and scraps from the many bottom-feeders and loan-sharks who trade rather than invest in promising innovation.
The considerable amount of forward-looking circumstantial evidence demonstrates how KPCB still does not understand the most excellent and most timely innovation comes from the attachment of technology to already existing socioeconomic value (like with Facebook). And innovation with the propensity to produce viable venture style returns for limited partners in its upcoming vintage comes from the deployment of risk – not to the discovery of new products for “new markets” – but the gaping exploration of new products to existing.
Many have asked me if I think KPCB has learned a lesson, and a few have asked if they reached out to me for advice. They should, but unfortunately, have not. Their arrogance would not allow them, nor do they need to, as there will always be another greater-fool to give the old emperor another shot.
I have no bone to pick with KPCB and hope that despite the strategy and communications hassles of the past and the imminent future, they can somehow pull themselves together. Not just for the sake of its limited partners, but for the resurrection of an investment thesis in venture capital that can inspire significant innovations to come, and re-establishes much-needed trust with the public.
Crossing fingers and waving the emperor’s sword may at this point, be KPCB’s best bet.
[iFund and sFund are trademarks of KPCB]