John Backus: Dispelling Entrepreneur and VC Myths

Since my last post debunking the five alleged myths of entrepreneurs triggered more than a few comments and thoughtful reactions, I wanted to respond collectively to them.

First let’s start out with venture capital performance as an asset class. Over the last ten years, it has been terrible. On an absolute basis the returns are in the low single digits. My partner at New Atlantic Ventures, Todd Hixon recently weighed in on the shape of VC today here to explain what’s going on behind the scenes.

What caused this? VC managers got greedy in the 1999-2001 period as LPs threw more money at them. Fund sizes mushroomed at the same time that the IPO market dried up. They were caught with too much money in sub-par companies, and no way out but modest M&A for an exit. The math didn’t work. And, since on a dollar-weighted basis, the big funds drive the average returns, their performance drove the industry benchmarks. Just because the average VC return was terrible does not condemn every VC in the asset class.

From December 31, 2000 to August 12, 2011, NASDAQ has gone from 2470 to 2508. Not very impressive. Mirrors the performance of VC as an asset class. But of course we all know that had you bought Apple (10X), Amazon (5X), eBay (2X) and Netflix (25X) 10 years ago, and added Google (6X) along the way, you would be sitting pretty today. So just as an awful ten years for the NASDAQ does not condemn every tech stock, neither should the average performance of VC as an asset class condemn every VC. In fact, according to Cambridge Associates’ recent numbers, “Venture capital performance also surpassed the public market indices for the quarter, five-, 15- and 20-year time horizons as of the end of 2010.”

In terms of VCs displacing “their portfolio companies’ founding entrepreneurs with their own hand-picked industry veterans.” It does happen, but not always. It happens when performance at the portfolio company stinks – and the hope is that someone new at the top can change direction (often with little success). It happens when the growth of the business outstrips the growth of the entrepreneur – a high quality problem, usually resulting in the entrepreneur voluntarily moving to a functional role better matching his/her skill set. A careful reader of my post will note, however, that the most valuable companies I identified in my last post – Apple, Microsoft, Google, Oracle, Intel and Amazon had founding entrepreneur CEOs for decades.

The gender issue sparked some strong opinions. Rather than have me go on, you’d probably prefer to hear from a woman – respected VCs in the industry like Deborah Farrington at StarVest and Scale Venture Partners’ Kate Mitchell (the current NVCA chair). But I will say this, yes in my personal defense: every firm has its own culture and operates differently. At our firm, we are looking to build businesses and make money for our LPs. We don’t care where you came from, or about your gender or ethnicity. We want to back the best and the brightest. Of the 19 companies we funded since January 2008, seven were funded by women, foreign-born entrepreneurs or minorities. Two of the ventures started by women-only teams – Fashion Playtes and Moda Operandi – are performing quite well. Those same women founders are still running their companies and have closed B rounds at up-round valuations with Fairhaven and NEA respectively.

A few might wonder if there is demand or a need for a group with a laser-like focus on helping women entrepreneurs. There is and it is called Springboard.

With our unemployment rate over nine percent, I’ll close with the jobs issue. I remain perplexed at those who don’t believe that VCs provide the matches and the lighter fluid to entrepreneurs who build big businesses. In fact, as one reader pointed out, The Kauffman Foundation issued a study that concluded “High-Growth Firms Account for Disproportionate Share of Job Creation.” We don’t do the hiring – our portfolio companies do – but I do think we deserve some credit for helping entrepreneurs turn their small businesses into big businesses. At our firm, over the last 11 years, we have backed 60 companies with $150M in capital across three funds. Those companies have created 10,000 jobs, the majority of which are in the United States and these companies did this with 100% private capital. I have spoken about this twice on Capitol Hill over the last year (watch some of my remarks here at minute 9:35), hoping that our elected officials might get the message.

John Backus
is a founder and managing partner with New Atlantic Ventures. He blogs here and tweets here. Opinions expressed by Backus are entirely his own.