Of Farmers Markets and Venture Capital
May 2023
Eric Rosenfeld
When we created OVF in 2007 we didn't ask, how can we compete against larger VCs? We said, we think we can build a better venture fund. Let's go do that. In the process, we broke several established rules and norms that we believe have positioned us to better serve investors and founders. Some of OVF’s better known innovations at the time included a $25K - now $50K - minimum to invest [vs. $250K to $1M minimums for conventional funds], an optional annual capital call [vs. 3 to 5-yr binding investor commitments for conventional funds], a collaborative approach to investing and supporting founders that enables OVF to add more value and make better decisions, and free ice cream or beer for life when a fund generates a >10X return [keeps us focused on swing-for-the-fences, home-run opportunities].
A lesser known OVF innovation is the structure of our fund management team, more traditionally called a “general partnership” [or GP], a vestige from the days when funds were structured as limited liability partnerships, like a law firm or medical practice. And that was a problem we wanted to solve: the vast majority of VCs were, and continue to be, structured like professional service firms, where partners are expected to find and serve their own clients. The model works well with doctors, dentists, lawyers, real estate and insurance agents, and similar, where services are mostly delivered individually by a qualified professional. An "eat-what-you-kill" management model and culture works well for motivated professionals delivering their service primarily as an individual practitioner.
It makes sense that the early venture firms borrowed from the other “professions,” including the long-established financial services profession, and adopted a general partnership management model, particularly since the venture profession was pioneered by wealthy individuals seeking to invest their own - or their clients’ - capital. The venture industry is also populated by former entrepreneurs and operators who admit they are not “boss compatible.” That is, they don’t want to - or simply can’t - work for someone else, they don’t want the responsibility of managing others, and they’re not a good fit for the highly collaborative, matrixed org structures common to growth companies and larger enterprises. Rather, the venture profession tends to attract practitioners seeking autonomy and decision-making freedom, including many who are brilliant, but perhaps skew eccentric and iconoclastic.
The problems with the conventional, lone gun, eat-what-you-kill VC management model and culture are evident to both founders and investors, including:
Varying founder experiences - Founders can receive vastly different experiences and levels of support based on which general partner agrees to champion them. Founders therefore vie to be championed by the more experienced, influential, and well-connected partners. Compared to a more senior partner, a more junior - and less-influential - partner may not have the clout to get an investment approved. Additionally, different partners may have slightly different investment selection criteria and biases. A founder’s startup could get rejected by a single partner, and thus rejected by the entire firm, even though a different partner in the same firm might have been more receptive and supportive.
Counterproductive incentives - Investors, too, may be disappointed if they were to witness the investment selection process and horse-trading that naturally occurs behind closed doors at a conventional general partnership - eg, “I’ll support your deal, if you promise to support mine;” or, “if you don’t support my deal, I won’t support yours.” If an investment goes south, the general partners can blame the loss on the individual partner who championed the deal, rather than take collective responsibility. This dynamic can cause individual partners to both hoard promising deals and unnecessarily dismiss opportunities that others in the firm might understand and appreciate better.
Individual – not team - loyalties - Traditional general partnerships can incent partners to be loyal first to those founders and investors with whom they have deep, proprietary relationships, perhaps to the detriment of their colleagues and their firm’s other investors. Once a general partner’s carried interest in a deal or fund is fully vested, they are free to jump ship and take their professional relationships with them [non-competes are hard to enforce], just as attorneys, financial professionals, and real estate agents are wont to do. This is one reason why Forbes’ annual Midas List of most successful VCs list individuals, not firms.
As a result, many of even today’s VC general partnerships have more in common with a farmers market - a platform from which to conduct one’s individual business - than a cohesive, integrated, high-performance team.
A core guiding belief for the Oregon Venture Fund has been that small groups of smart people in a well-run process can make better decisions and add more value than any single individual over time. Instead of a traditional conglomeration of individual partners, OVF is organized into a series of teams. OVF’s sourcing team, led by Deepthi and Jon, works with our venture partners to find, connect, and cultivate new startups who could be potential candidates for a diligence sprint. Our diligence practice, led by Alline and Deepthi, collaborates with expert venture partners to conduct quick, focused diligence sprints that are designed to expose founders to the entire firm’s network and full range of relationships and resources. Matt spearheads portfolio support for the whole fund, not just his deals, and involves dozens of venture partners who serve on portfolio company boards and as door openers. Everyone assists with recruiting and with customer intros for the portfolio, channeled through a single deal lead for each company. Because OVF’s fund management is organized by workflow, and not by siloed or overlapping partners, we can deliver a more cohesive, consistent, satisfying, and high-quality experience for founders. When a founder engages with OVF, they benefit from the fund’s extensive network of expertise and relationships, not just an individual partner’s.
In addition to organizing ourselves by areas of expertise, to ensure everyone feels responsible for the success of every investment we compensate ourselves as a team. Unlike most venture funds, OVF fund managers own a carried interest in each fund, and not in each company. That is, our individual carry doesn’t vary by company. Everyone is incentivized to assist all companies. One person’s relationship is everyone’s relationship.
Any management model has its drawbacks, and OVF’s isn’t perfect. One feedback we occasionally hear from founders is that our efforts to evaluate, invest in, and support them as a cohesive, integrated team can feel like a series of hand-offs, not unlike a customer moving from a sales rep to an account manager and customer success team. While our team approach to venture investing may be occasionally disorienting for founders used to working with a single general partner at a traditional fund, we’ve found that team-oriented founders appreciate and gain the most benefit from our team-oriented model. And our investors certainly appreciate the transparency and consistently superior returns that our integrated, collaborative approach to fund management provides. Another potential drawback: It’s unlikely Forbes will ever include someone from OVF on its annual Midas List, as they would have to include our 9-person fund management team and 180 venture partners, since we’re in this together.
While farmers markets are fun and wonderful and have their place, the experience can be hit or miss. If venture capital wants to evolve from a cottage industry to a more modern industry that can more easily and consistently surprise and delight founders and investors, we believe it will take more teamwork to make the dream work.