The Venture Capital industry is ripe for disruption. Too many firms, too few returns, and an industry predicated on investing in disruption that fails to disrupt itself.
Over the last few years, super angels offered new capital to the market and groups such as Y-Combinator provided young entrepreneurs new avenues to success. The venture industry, however, lacks a very common model that the hedge fund industry has mastered - the emerging manager strategy.
Emerging managers are young, smart, and successful analysts or portfolio managers who cut their teeth with a major hedge fund. After 3-5 years of stellar returns and performance, they often leave and raise small funds from their former employers, hedge fund leaders, or limited partners who specialize in identifying and seeding up and comers.
For example, Julian Roberston is not only the founder of Tiger Management, but he is also the "father" of the so-called Tiger Cubs. Many of today's hedge fund leaders got there start working with and then being seeded by Julian Robertson - including, John Griffin, Lee Ainslie, Andreas Halvorsen, and 40+ others. Paul Tudor Jones, another leading investor, continues to seed deserving managers, including Two Sigma.
Why don't we see a similar model at play in the venture industry? Having spent six years in venture, I know there are many talented young investors chafing to rip up the playbook and disrupt the market.
Sadly, it is virtually impossible for them to raise capital. Why?
Venture returns take years to produce, while the hedge fund industry is marked to market daily and over a year or three, one can build up a track record and demonstrate "alpha," the holy grail of alternative investments. Moreover, given venture investments are illiquid, redemption and getting your money back is much, much harder than in the hedge fund asset class.
Recently, I had the pleasure of visiting Tiger's NYC offices and spending time with a senior executive. Tiger, you see, does not solely rely on alpha. Over the last twenty years, all hires and prospective Tiger Cubs have been given a IQ, personality, and logic test. With twenty years of results, Julian is able to benchmark any new candidate against the industry's very best. The combination of investment strategy, results, test results, and in-person interviews allow him to allocate capital to an emerging manager with a system and then to measure and watch.
So, in order to pull of an emerging manager strategy, one would need to be able to identify talent independent of cash on cash returns and solve the redemption problem. I believe that both limitations are solveable.
We all know who the rising stars are in the industry and I am confident that a decent share of them would be willing to hang their own shingle and create their own destiny. Moreover, with the rise of secondary markets and innovations that I can only imagine exist, the liquidity/redemption issue seems workable as well.
Will we see an emerging manager strategy work in venture? Will a lion of the industry emulate Julian Robertson and seed the next generation of top firms? There is a capital allocation problem in venture today - bad firms are getting allocations at the cost of new firms starting with hungry GPs ready to kill it.
Until the industry can allocate capital to the future stars and not to a 10 year old investment track record, I don't think we will see the disruption in our asset managers that the technology industry deserves.
Thoughts?
Over the last few years, super angels offered new capital to the market and groups such as Y-Combinator provided young entrepreneurs new avenues to success. The venture industry, however, lacks a very common model that the hedge fund industry has mastered - the emerging manager strategy.
Emerging managers are young, smart, and successful analysts or portfolio managers who cut their teeth with a major hedge fund. After 3-5 years of stellar returns and performance, they often leave and raise small funds from their former employers, hedge fund leaders, or limited partners who specialize in identifying and seeding up and comers.
For example, Julian Roberston is not only the founder of Tiger Management, but he is also the "father" of the so-called Tiger Cubs. Many of today's hedge fund leaders got there start working with and then being seeded by Julian Robertson - including, John Griffin, Lee Ainslie, Andreas Halvorsen, and 40+ others. Paul Tudor Jones, another leading investor, continues to seed deserving managers, including Two Sigma.
Why don't we see a similar model at play in the venture industry? Having spent six years in venture, I know there are many talented young investors chafing to rip up the playbook and disrupt the market.
Sadly, it is virtually impossible for them to raise capital. Why?
Venture returns take years to produce, while the hedge fund industry is marked to market daily and over a year or three, one can build up a track record and demonstrate "alpha," the holy grail of alternative investments. Moreover, given venture investments are illiquid, redemption and getting your money back is much, much harder than in the hedge fund asset class.
Recently, I had the pleasure of visiting Tiger's NYC offices and spending time with a senior executive. Tiger, you see, does not solely rely on alpha. Over the last twenty years, all hires and prospective Tiger Cubs have been given a IQ, personality, and logic test. With twenty years of results, Julian is able to benchmark any new candidate against the industry's very best. The combination of investment strategy, results, test results, and in-person interviews allow him to allocate capital to an emerging manager with a system and then to measure and watch.
So, in order to pull of an emerging manager strategy, one would need to be able to identify talent independent of cash on cash returns and solve the redemption problem. I believe that both limitations are solveable.
We all know who the rising stars are in the industry and I am confident that a decent share of them would be willing to hang their own shingle and create their own destiny. Moreover, with the rise of secondary markets and innovations that I can only imagine exist, the liquidity/redemption issue seems workable as well.
Will we see an emerging manager strategy work in venture? Will a lion of the industry emulate Julian Robertson and seed the next generation of top firms? There is a capital allocation problem in venture today - bad firms are getting allocations at the cost of new firms starting with hungry GPs ready to kill it.
Until the industry can allocate capital to the future stars and not to a 10 year old investment track record, I don't think we will see the disruption in our asset managers that the technology industry deserves.
Thoughts?
