My Capital Evolution co-author, Elizabeth MacBride, and I have been reflecting this past week on the words of Dr. Martin Luther King and how they continue to resonate deeply as we face both economic and social challenges. We’re committed to broadening the call to use the tools of Evolved Capitalism that give all Americans, and importantly, the companies they work for, the opportunity to thrive. Below is a piece we wrote in honor of Dr. King’s birthday.

“When machines and computers, profit motives and property rights are considered more important than people.”

“A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth. With righteous indignation, it will look across the seas and see individual capitalists of the West investing huge sums of money in Asia, Africa, and South America, only to take the profits out with no concern for the social betterment of the countries, and say: ‘This is not just.’”

These words are not Bernie Sanders on the campaign trail demanding universal healthcare. Nor were they spoken by Marjorie Taylor Greene, arguing for President Trump to focus less on foreign wars. They were not heard from New York City’s mayor, Zohran Mamdani, making the case for affordability.

They are the words of Dr. Martin Luther King Jr., shared nearly 60 years ago.

The bipartisan frustration with capitalism is not new. In the final years of his life, Dr. King advocated for an “economic bill of rights” designed to address the root causes of poverty by guaranteeing a meaningful job and wage for everyone. King wanted systemic change, not one-off government programs that addressed things like homelessness, mental healthcare, or food assistance. We’re in the midst of an era like Dr. King’s, in which divisiveness threatens to overcome optimism and progress.

Congress is not the answer– interesting proposals like a Universal Basic Income, which were once supported by staunch conservatives like Milton Friedman and progressives like Dr. King, seem out of reach in today’s politics. Worst of all, the Trump administration shows us government programs can be cut after every election, with a stroke of the pen. 

We need a new movement for an economic bill of rights – a new consensus that will drive America forward to a more just future. The change has to come – and already is beginning – in the business world. When we researched our book, Capital Evolution, we found a new movement toward broader ownership to restore economic security. Giving people equity in the economy they help create is the best way to secure their position in it. 

We are living through a time when fundamental assumptions about our economy and role in the world are being called into question. The current version of capitalism that we practice has only widened the inequalities Dr. King identified. An emblematic tale for the past 50 years is General Electric, which was one of the first 12 companies to join the Dow Jones and a business that delivered tremendous value to society over the first part of the 20th century. When Jack Welch became the CEO in 1981, he was singularly focused on GE’s stock price. He fired over 250,000 people during his tenure, the bottom 10 percent of GE’s workforce annually, regardless of the performance of the business. GE saw historic gains in stock price, but its pursuit of short-term profits led it to adopt misleading and, at times, nefarious accounting practices. After struggling for many years, GE was removed from the Dow Jones in 2018, and few people can name a big innovation from the company since. Shareholders got rich; our society suffered.

In the 1960’s a child born into the bottom quarter of wealth had roughly a one-in-four chance of reaching the top quarter by adulthood. Today, that chance has collapsed to one in twenty. The average first-time homebuyer is now 41 years old. Young Americans can’t afford to purchase a home or pay off their college debt.

Wealth concentration mirrors the late 1920s. The wealthiest 10 percent of Americans own 92.5 percent of all stocks. About two-fifths of Americans don’t own any stock. Meanwhile, CEO compensation has soared 900 percent over fifty years, while worker pay rose just 12 percent.  It is no wonder the share of Americans with a positive view of capitalism has declined eight points to 57 percent in just five years. 

The good news is business leaders are starting to evolve. For example, former PayPal CEO Dan Schulman surveyed his 23,000 employees in 2019 and discovered something alarming: a customer service representative in Omaha was selling his blood plasma twice a month to make ends meet. On paper, PayPal was paying at or above market rates. Schulman realized that benchmarking against competitors didn’t mean his workers were okay. He raised wages, switched to weekly pay, and boosted healthcare contributions. The company continues to thrive and Schulman got the equivalent of a promotion in the world of CEOs: he was recently named to lead Verizon.

Private Equity firm KKR co-head Pete Stavros grew up watching his father operate a road grader in Chicago for forty years. His father complained about misaligned incentives: work too fast and your hours go down, your paycheck goes down. Today, Stavros has made employee ownership central to KKR’s strategy. Line workers receive multiples of their annual salary when companies are sold. At Optimax, founded by two former Kodak line workers, employees receive 25 percent of monthly profits. 

Businesses have a clear choice: cling to an outdated, extractive form of capitalism that fuels inequality, or embrace a model of shared prosperity by expanding ownership. They can eliminate workers with machines, or give them some stock, employee ownership trusts, and equity participation. The rest of us have a choice too: consumers should continue to choose companies that share prosperity with workers and communities; educators must choose to teach the next generation on the value of ownership, and investors must demand their portfolio companies create more owners.

Dr. King wrote that Black Americans “expect their freedom, not as subjects of benevolence but as Americans who were at Bunker Hill, who toiled to clear the forests, drain the swamps, build the roads, who fought the wars and dreamed the dreams the founders of the nation considered to be an American birthright.” Ownership will deliver equality, and we must demand it.

Over the past decade, my wife, Greeley, has been restoring buildings along Main Street (and a few adjacent streets) in Longmont, helping lead a transformation in our local downtown. I’m really proud of the work she’s doing and the vision she has for how these projects can lift up downtown Longmont.

If that weren’t enough, she also recently opened a bookstore in one of the buildings she remodeled. Composition Shop is truly special. It’s beautiful, warm, and welcoming. In addition to a great selection of books, the shop also sells chocolates (really, really good ones) and stationery. As an added bonus, our dog Timber is the store greeter. 

It’s been really gratifying to watch Greeley work. She has a long and deep background in construction management. Through her company, I-Beam Colorado, Greeley has focused for the last 4 years on renovating century-old buildings, preserving their historical character while adapting them for modern use. She currently owns six properties downtown, housing local businesses such as Juniper Goods, Flower Wild, and Bakewell, along with office tenants on the upper floor. Two additional projects are currently in development.

The work is meticulous and often underappreciated, but its impact on the downtown area is significant. A recent article in the Denver Business Journal highlighted Greeley’s efforts, noting how she’s restoring original tin ceilings, historic storefronts, and other long-overlooked details across several buildings on Main Street. This kind of reinvestment is helping reshape downtown Longmont, bringing renewed energy to the area.

The Composition Shop is a particularly meaningful part of this broader vision. Greeley has approached it not just as a developer but as a reader, designer, and community member. If you’re in the area, I encourage you to visit – 356 Main Street. If you’re outside of Longmont you can order directly from her site. AND, if you listen to audio books (like I do), you can use Libro.fm, a platform that supports independent bookstores, and designate Composition Shop as your local store. I’ve switched to Libro.fm from Audible – it’s been an easy transition. Side note: if you’re interested in what I’m reading, I recently signed up for Goodreads and have recorded my current reading as well as books I’ve read in the past 2 years or so. You can also follow Composition Shop on Instagram or leave a review on Google or Yelp. 

Lastly, I wanted to flag for you that on May 28, my partner Brad Feld will be hosting a “Random Day” at The Composition Shop. He’ll be available for 15-minute meetings throughout the day and will be signing copies of his upcoming book, Give First: The Power of Mentorship, ahead of its official release. It’s a great opportunity to engage with Brad and support the local community. For more details, visit Brad’s announcement on his blog: Random Day on 5/28 at The Composition Shop.

It’s been a privilege to watch this project come to life—and even more rewarding to see how it’s already starting to shape the next chapter of downtown Longmont.

Every venture firm reports the “value” of each of its underlying investments. Typically, this is updated quarterly and sent to each of the fund’s investors. The idea is that investors will then have a definitive view of the value of the firm’s investments. Simple, right? But what is the “value” of a private company? Turns out the answer to that question is not so easy to determine, and, as a result, valuation reporting in venture is a mess.

Prior to 2007, most firms held company valuations at the price of the most recent round. This was relatively straightforward and generally pretty consistent across funds. The rationale for this approach was that the best indicator of value was the last “market” price someone was willing to pay for the asset (this approach has some limitations, which I describe below). Under this methodology, GPs did have some discretion to write companies up or down (meaning to say that their value was more or less than the last round

had indicated) due to performance or changing market conditions – especially if the last round was a while ago and the valuation mark was “stale.” Typically the threshold to do this was quite high, meaning that something with the business, the market, or the company’s prospects had to have clearly and materially altered to warrant a change in valuation. While definitely not perfect, this methodology made for relatively uniform reporting (it was uncommon for companies held in different portfolios to be reported at different values – that typically only happened in edge cases with businesses that hadn’t raised in a while, although quite a few funds had policies that held all companies at a maximum of the last round price). There was certainly some incentive for perverse behavior – raising money to establish a new valuation benchmark, or unjustified discretionary mark-ups (say around the time a fund was going out to maket with a new fund), but these were actually relatively uncommon, and most funds only had discretion to write down assets, not write them up.

But there was a concern that this methodology wasn’t rigorous enough and – especially in the wake of the Enron scandal, where the company manipulated its balance sheet by misrepresenting the underlying asset value of various entities it had interests in (among many other things) – there was a desire to make sure that assets of all kinds were valued “accurately.” And some LPs didn’t like that high-performing companies that didn’t have a need to raise capital were “artificially” being held a lower valuation based on their last round price. 

Enter FAS 157 (Fair Value Measurements), adopted in the fall of 2006 and enforced for reporting periods after November 15, 2007. The idea behind FAS 157 made a lot of sense: GAAP provided varying methodologies for establishing the fair value of assets and investors and regulators wanted greater consistency and transparency in reporting. FAS 157 (and subsequent modifications) established an “exit value” concept for valuations – basically asking reporting entities and their auditors to establish the price at which an independent 3rd party would purchase an asset. In 2009, FAS 157 was integrated into ASC 820 (Accounting Standards Codification) which classifies assets based on their liquidity (level 1 assets have publicly quoted market prices; level 2 assets aren’t directly quoted but can be relatively easily valued based on market prices; and level 3 assets are those whose value cannot be compared to market prices and which rely on a firm’s internal methodologies for establishing a valuation benchmark). To be clear, FAS 157 and ASC 820 (from here, I’ll start referring to this as ASC 820 as that’s the standard currently in effect) cover many different types of assets – the reporting by venture and other private funds is just one type of asset that is subject to this standard. 

However, inside the venture industry, the adoption of ASC 820 caused significant changes in how portfolios were valued. Funds could no longer rely on their existing valuation policies and instead had to establish the “fair value” of each underlying position using varying methodologies approved under the new standard. This was expensive, but more importantly, it caused surprising divergences between how the same asset was reported from one fund to another, depending on the methodology used, the inputs to the valuation model, and the requirements of the audit firm that had to sign off on the fund’s valuations. This only highlighted that company valuations are more art than science. But the accounting standards treated them as the latter and fund LPs required more and more “rigorous” back-up and reporting. All of this, in my view, has made fund reporting less accurate and more subjective, despite its intention to do the opposite. And while valuation reporting used to be more uniform across the venture industry, it has now become much less so. 

I recently helped a fund with their valuation policy, and we asked several of their LPs for a “best-in-class” valuation policy. No one could come up with one. The reason is that, under the ASC 820 standard, there doesn’t seem to be one. I understand why LPs want to understand the current value of a portfolio and that they may not have either the technical expertise or access to the right data to go through each of their underlying portfolios and value them in the way they would like. However, in an attempt to create clarity and truth, all we’ve done is obfuscate value even further by introducing more variables, more subjectivity, and more inconsistency into the process. I sincerely believe that most venture firms do their best to come up with a fair value for each asset they own (we certainly do at Foundry) but given the number of variables and the different accepted methodologies for valuing private assets, it’s not surprising that FAS 820 has introduced even more variability and subjectivity into the process. 

I know this won’t happen but I wish we would just go back to the simplicity of valuation policies that only allowed mark-ups on price rounds and allowed modest discretion for GPs to write down under-performing assets. This would massively simplify valuation procedures and make them much more uniform. It wouldn’t, in my opinion, materially obscure fund performance. The chaos caused by 157/820 has not been worth it. We’re not closer to reporting the exact “value” of our portfolios…we’re further from it than ever. 

Just before the end of the year, Erin Griffith of The New York Times published an article titled “What Is Venture Capital Now Anyway?” It’s a provocative look at the state of venture capital and, as these sorts of things are want to do, very quickly started making the round in venture circles as VCs tried to map how they fit into the landscape that Erin describes – a split in how VC firms are operating: some firms are keeping to a smaller, boutique style while a handful are becoming behemoths, almost unrecognizable as venture firms. There’s very little in between.

I think Erin’s description of how our industry is evolving is spot on. But this evolution in the venture market isn’t a surprise. In fact, it’s something I wrote about years ago – back in 2010. In that post, I described the bifurcation of the venture industry and predicted that large, muti-stage, multi-sector firms would continue to raise ever larger funds and that firms with smaller, more focused funds would proliferate at the other side of the market. I described the evolving landscape as increasingly barbelled – predicting that there would be relatively few firms in the middle. At one end of the barbell would be essentially asset managers (asset aggregators) and at the other, smaller firms that were more in the mold of what we historically thought of as venture. The former would be seeking beta and predictable, if lower, returns. The latter would be seeking alpha and greater risk. The middle of the barbell would be sparsely populated and firms inhabiting that space would run the risk of being too large to execute the alpha strategy but too small to be considered true asset aggregators. 

I wrote a follow-up piece in 2013, parsing some then-current statistics from the NCVA that backed up what I had predicted in 2010. This trend – as Erin points out – is even more true today. In the 2013 post, I highlighted a few firms that were clearly on their way to the asset management side of the venture barbell. All have subsequently gone on to raise enormous funds: NEA (most recent fund: $6.2B), Norwest ($3B), A16Z ($7.2B), and Khosla ($3B), in particular. But also firms like Greylock ($1B) and CRV ($1B). 

I didn’t fully understand the ramifications of the trends when I was first writing about them, but the implications of this continued bifurcation are becoming clearer to me. We often say at Foundry (where we have a fund investment practice and make direct investments) that fund size is fund strategy. That’s always been the case but is even more so now. Fund size has implications for both the kinds of deals your firm pursues, how concentrated your portfolio can be, as well as your approach to valuation and structure (not to mention fundraising – many LPs prefer to be able to write large checks to a small number of firms, something that is putting pressure on fundraising for the smaller end of the market as large firms hoover up a meaningful percentage of LP dollars each year).

I’m not at all saying that large funds are a bad strategy. It’s just a strategy different from what smaller firms at the other end of the barbell are pursuing. And the resources that these firms bring to their portfolio companies make them potentially quite attractive to entrepreneurs (and as co-investors in the right circumstances). But it also means that they have a different risk profile than smaller, earlier-stage investors, which can create misalignment across a cap table (earlier investors wanting to take more risk, asset aggregators looking for more modest risks, and assured returns). All of these firms describe themselves as “venture” but investing from a smaller fund, where returns are driven by a very small number of deals, is very different than investing from a larger fund where (whether you admit it or not), you are trying to put larger dollars to work in any given investment and where the dollar return can be more important than the multiple you generate. Larger firms are also generating a more significant percentage of their pay-outs to GPs from management fees than from carry. 

The firms mentioned above who have all raised funds > $1B (in some cases many times that amount) are operating a different business than funds at the smaller end of the spectrum. They aggregate massive amounts of capital across a large and diverse set of funds and often build huge organizations to support their work. One of the key signs that a firm is in the asset aggregation business is not just the size and scope of the organization but specifically the size of its marketing and PR groups. These firms are often quite adept at pushing out materials and content (much of it high quality) to stay front and center in the market – not just among entrepreneurs but, importantly, among LPs. They require meaningful fundraising capacity to keep feeding the asset machine. Their funds are typically consistent performers but are unlikely to generate outsized returns. Importantly, they can accommodate very large LP checks, which many LPs like, and they are a brand name that LPs also feel comfortable with (as I often say, LPs are not in the risk business; they’re in the capital allocation business – which is very different). These firms are chasing something more akin to beta than alpha for the most part, although occasionally they’ll be early into a new market (AI or crypto are examples – especially in the case of AI where early investments required massive checks, which smaller firms were not set up to provide).

On the other side of the spectrum are firms that are true venture firms in the traditional sense. Their funds are smaller, and they tend to raise funds that are similar in size from one fund to the next. They take real swings. They make more of their money on carry than fees. Benchmark is a great example, a firm that Erin Griffith mentions in her article, but many other funds also have this model. Founder Collective may be the quintessential fund of this type (having stayed remarkably true to their mission and fund strategy across many fund cycles), but funds like Union Square Venture also come to mind. Because they’re going after alpha there’s more of a risk of a badly performing fund (and bad vintage) but they’re also more likely as a group to have funds that exceed 3x which is nearly impossible for the asset management funds to do. 

More in a future post about the operations of funds at each end of the barbell, as well as some commentary about what happens when you get stuck in the middle. I can understand why Erin’s article made the rounds so quickly. The evolution of the venture market – especially in a cycle of decreasing liquidity and tightening fundraising – is important to track. 

We just made public over on the Foundry blog that our 2022 fund will be our last Foundry fund. I wanted to add a few personal thoughts here. 

When we started Foundry, we were very open about our intention to eventually wind our operations down rather than try to build a generational firm. Over the course of Foundry, we deliberately structured our work in a way that reflected this goal, keeping our organization small and each of the Foundry partners closer to the portfolio (both the companies each of us was responsible for, but also across the portfolio more broadly). We’ve avoided unnecessary silos and kept our focus externally – on companies and our investors – rather than spending time on firm building. For a minute, we flirted with the idea of Foundry continuing (adding more new partners and creating a platform that would outlast us), but as we discussed it more, we ultimately returned to first principles – we focused on investing and supporting our portfolio and not on creating a platform that would outlive us. This is exactly what we envisioned when we started Foundry in 2006, and today marks the public acknowledgment that, with the 2022 fund, we’re ready to stop adding new funds to the mix.

This is something that I’ve personally been thinking about for a while. About a year ago, I started talking publicly about my plan for the 2022 Foundry fund to be my last as a partner at Foundry. I didn’t make a big announcement about it – just started mentioning it in situations where it seemed natural to do so. It felt good to acknowledge it and while I didn’t have a great answer to the obvious next question, I was excited to be able to talk openly about such an important transition in my life. At the time, I wasn’t sure if we would make the same decision for Foundry as a whole, but since I knew my intentions, I thought it would be appropriate to be open about it. 

After more discussions internally and careful consideration, we decided that the 2022 fund would be Foundry’s final fund as well. Choosing not to be a legacy firm is one way we’ve challenged norms in the venture industry and just one of many things we take pride in as we reflect back upon our time building Foundry. We’ve loved experimenting with the venture model, whether that was building the first VC AngelList syndicate, investing in markets across the country where venture capital was less prevalent, being among the first GPs to institutionalize a fund investment practice, and attempting to bring transparency, openness (and hopefully some humor) to the venture industry. 

We announced our latest fund last May, and we still have plenty of capital to deploy into new companies as well as into the existing portfolio. For now, it doesn’t really change anything in terms of our day-to-day work. 

Making a statement like this – that we’re done raising new Foundry funds – is anticlimactic. Venture is a funny business: there’s no day when you pack up your desk, get your gold watch, and leave. So tomorrow will be much like today – we will continue to look at new investment opportunities and work with companies across the Foundry portfolio. I have the same board seats today that I had yesterday. I woke up today focused on my Foundry work, just as I did yesterday and just as I did last week. We raised our last Foundry fund at a fortuitous time, just as the markets cooled off (it’s a great time to be investing), and we have another two years or so of new investments to look forward to. Not to mention a decade or longer of work with the portfolio after that. 

I love Foundry and am incredibly proud of the work we’ve done and continue to do. I had no idea in 2006, when we started Foundry Group, what this journey would be like. I was incredibly lucky to be at the right place, at the right time, and with the right partners (who are among my closest friends).  We have always prided ourselves on a collaborative work environment and have genuinely supported each other over the past 18 years. At the time we started Foundry, I don’t even think I knew enough to have considered the path that we eventually took (8 funds and over $3Bn in assets, starting a fund of funds, nearly 200 investments, and an honest and transparent approach to venture). It was, and continues to be, an amazing journey. I have a true love for this work, my partners, our portfolio CEOs, LPs, co-investors, and the many others with whom I have the pleasure of working.

The obvious question, I suppose, is “what’s next.” And while that’s a fair question, the truthful answer is: “I’m not entirely sure.” I have a bunch of ideas for how I’ll stay close to startups – my real passion continues to be around engaging with founders. But with a decade or more in front of me working with the companies we support at Foundry and a few years remaining in the investment period for our 2022 fund, I’m more focused on my current work than on what’s next. That said, I have some ideas I’ve been working on in the background that I’m excited to share more about when the time is right. More than what I do, I’ve been thinking a lot about how I do it: how and where I spend my time, along with the elusive dream of having more control over my schedule and the ability to be more fluid and less structured in my work and life.

I’m excited for what comes next…

This article is cross-posted from The New Builders Dispatch, a publication founded and run by my New Builders co-author, Elizabeth MacBride. 

A few weeks ago, the American Alliance for Equal Rights won a legal victory in Atlanta when the 11th U.S. Circuit Court of Appeals temporarily blocked a small venture capital fund, Fearless Fund, from running a grant contest that awards $20,000 grants to small businesses led by women of color. The victory may or may not be temporary (this was a temporary stay, not a full adjudication), but the point has been made – there are those like the Alliance who live in fear of a changing world and far too many who support them.

We’ve seen the American Alliance for Equal Rights before: the man behind the Alliance, Edward Blum, brought the successful lawsuits against Harvard University, The University of North Carolina, and The University of Wisconsin that ultimately eliminated race-conscious college admissions programs in the landmark Supreme Court decision, Students for Fair Admissions v. University of NC, et al. But because of the lack of knowledge about how the financing system for small businesses and startups works (or doesn’t) in America, many people may miss the significance of the decision by the three-judge 11th circuit panel. The Alliance is striking a blow at the heart of private enterprise in America.

It’s not the Fearless Fund or the dozens of other interesting experiments in early-stage finance going on across the country that are imposing simplistic race-based thinking on America, it’s the Alliance.

A Profit-Driven Business Model
Fearless Fund, as well as other venture capital funds and accelerator programs, are private enterprises doing what private enterprises (including nonprofits) do: they are serving a fast-growing market for the purpose of making money. In this case, since they are investment companies, they are seeking first and foremost to make returns for their investors. Women and people of color are the fastest-growing groups of entrepreneurs in America. And since the pandemic, people are starting companies at near-record rates. While Fearless Fund is a 501(c)3, it exists to make money for its investors if its management and investment decisions are smart.

It’s not the government’s business, or the legal system’s, to dictate how entrepreneurs or venture capitalists invest their time or money. When the government dictates how capital should be apportioned and to whom, that is the definition of another economic system: Marxist communism.

Not A Zero-Sum Game
In the lawsuit, the Alliances alleges that some of its members – small business owners – were harmed because they could not apply for the Fearless Fund’s grant program. But this betrays a fundamental lack of understanding about how small businesses and financing work. (In reality, we’re sure the Alliance understands perfectly well how all this works).

Unlike college admissions or jobs, funding for startups is not a zero-sum game. A White entrepreneur didn’t get funding because a Black woman did. Indeed, the statistics suggest the system of small business and innovation financing is still working reasonably well for the people it was set up in the 1950s to serve: White men. (Though it could probably work even better). America still remains by far the largest venture capital market in the world.

This system isn’t about perfect fairness: It’s about measured risk-taking based on the unique insights of investors and entrepreneurs working together.

By Their Actions, You Can Judge Them
Venture funds that aim to fund companies led by people of color, or women, or veterans (or any number of other criteria) expand the number of total startups. It only benefits the country if an investor and an entrepreneur make a match that creates jobs, economic energy, and innovation – all of which we need.

The Alliance’s challenge frames the work of venture funds as giving underrepresented groups a boost in their “careers,” probably because the Alliance’s ultimate target is large companies’ workplace policies. But venture funds don’t employ entrepreneurs.

Unfortunately, many journalists covering the case have picked up the Alliance’s framing.

The Alliance purports to support a race-blind society and belongs to a conservative coalition that includes nominal adherents to the idea of free markets. If they were true to this philosophy, they would be working on the two fundamental problems with the financing system for small businesses. First, is that the majority of today’s entrepreneurs are women and people of color.

Fearless Fund and others aren’t set-aside programs. They’re addressing a need in the market that the historically white-dominated system hasn’t moved fast enough to meet. It’s as simple as that – and every dollar an investor feels motivated to risk in the system boosts everyone.

The second, and probably even more important reason, falls squarely in the wheelhouse of people who purport to care about free markets: Changes in the banking sector, including government regulation that helped produce consolidation, have made it unprofitable for banks to lend to small businesses. Government isn’t the enemy, it’s a regulator that can in some cases do more harm than good, as arguably it has in this one.

Twitter-Era Doesn’t Belong in the Real World
The Alliance’s challenge is black-and-white, oversimplified thinking that is more a product of the social media-driven political system than the complicated and nuanced real world. Applying this kind of thinking to the world of messy early-stage finance is potentially deadly. Early-stage finance works precisely because it is messy. Experiments like Fearless Fund have to be given a chance to work – and if they don’t, there’s a great mechanism that will shut them down: It’s called profitability.

The profit-driven business model that the Alliance is attacking is more likely than any other motivation to solve issues surrounding systemic racism in America. Could that be why the Alliance is attacking private enterprise?

Like many of you, I’ve been reflecting on the implosion of Silicon Valley Bank quite a bit this past week, now that the initial panic has faded into a dulled sense of disbelief. Certainly, there were warnings that SVB was in trouble (most notably from Seeking Alpha – in December – asking if SVB was a blow-up risk and, as if time traveling, describing almost exactly what would come to pass just a few months later). Many others have commented on how and why SVB (and soon after Signature, and nearly First Republic Bank and Credit Suisse) imploded. If you’re interested, I think Matt Levine from Bloomberg has the best overviews of what led to the crisis of last Thursday and Friday (see here, here, and here on SVB; here for an overview of what happend with CSFB, and for those paying close attention, here for what, at the time, we thought was an isolated “crypto thing” in the failure of crypto bank Silvergate, but perhaps was a harbinger for the weeks ahead). 

I don’t really feel like rehashing the last week and will let others do that work. But a few things that aren’t being broadly talked about broadly are on my mind. The first, and perhaps most important, is just how important smaller banks are to our economy. Our banking system has become increasingly consolidated over the past few decades – from over 10,000 banks in the mid-90s to barely 4,000 today. Most of this consolidation has come at the expense of smaller community banks and largely, the consolidators have been the country’s biggest banks. So much so that the 4 largest banks controlled over 80% of US deposits before the SVB collapse (and the understandable run to safety that had many depositors opening new accounts at the likes of JP Morgan and BofA has surely increased this number in the past weeks). These larger banks are no doubt important infrastructure in our financial system. But so are smaller banks. As Dina Sherif of MIT and Pia Sawhney of Armory Square Ventures point out in their excellent OpEd in CNBC last week, and as Elizabeth McBride and I discussed in much longer form writing in The New Builders, smaller banks provide critical infrastructure for our entrepreneurial communities – especially women and people of color. SVB itself banked companies across the US and was one of the few banks that would take on smaller venture capital funds (the average venture capital fund size is $56M, according to the NVCA). I personally watched smaller funds struggle to find other options as they scrambled to figure out how to keep their funds operational in the days after the initial SVB scare (most of the funds in Foundry’s partner fund portfolio have less than $100M in assets – a threshold below which larger banks are willing to take them on, especially for the full array of banking products that a fund needs). More broadly, our research for The New Builders showed us just how important smaller banks are to the broader entrepreneurial ecosystem. Simply put, smaller banks do a better job lending money to a wider set of small businesses than the more programmatically run larger banks. Our economy and our finance system needs these smaller banks (also worth keeping in mind that fewer than 1% of companies take in venture capital money; it’s an important part of our economy and drives our innovation economy, but most businesses and most entrepreneurs aren’t seeking venture investment). Our regulatory system must do a better job of understanding this. And the two-tiered system that was put in place by Dodd-Frank, where some banks were deemed too big to fail and were “globally systematically important (G-SIB),” while most were not, isn’t working. Relieving smaller banks from the same reporting and other burdens of larger institutions makes sense (and, as we pointed out in our discussion on this topic in TNB, regulatory overhead is one of the factors driving bank consolidation), but doing so in a way that creates certainty around a small number of huge financial institutions and uncertainty around thousands of others, creates instability across the system. We witnessed that firsthand in the past week as smaller banks faced meaningful runs on deposits as people fled to the safety (and government guarantee) of the country’s largest banks. In an odd nod to the importance of smaller banks, we even witnessed larger banks stepping in to prop up First Republic Bank, which continues to be at risk of failing (I’m sure this was driven by a directive from the FDIC or similar government action, but still notable). There are some clear policy implications here, but that’s a topic for another post, I think…

Also on my mind as I contemplated the past 10 days of craziness was what  William Forster Lloyd described as the “Tragedy of the Commons” (the tendency for groups of individuals to act in their own best interest at the expense of the greater good). A bank run certainly fits the bill, as we all witnessed. While it is clear that SVB needed a capital infusion (and that they handled their attempt at raising capital – and specifically the timing and content of announcing that capital raise – extremely poorly), it was the behavior of their depositors that caused the collapse of SVB (and Signature Bank for that matter). If you’re SVB, this is perhaps better described as the Tyranny rather than the Tragedy of the Commons. If the group of depositors had acted in the interest of the whole, the demise of SVB would likely have been averted. It’s hard to say exactly what caused the bank run at SVB – plenty of chatter points fingers at certain venture funds issuing directives to their portfolio companies on Wednesday night and Thursday morning to remove funds from the bank. How much of that is true and how much that was the catalyst for, or just a symptom of, a larger run on the bank is hard to say. But it brought something to mind that I suppose I always knew was the case, but perhaps was wishfully thinking was not so. 

It turns out that the Tragedy of the Commons often doesn’t hold for many communities that have shared values and connections. Elinor Ostrom, the first woman to win the Nobel Prize for Economics, is best known for her ideas in this area. Living through the Great Depression, she witnessed the way her community banded together to survive. This informed her ideas, but also her approach to her subject – preferring to be in the field and in the trenches rather than observing from afar. This makes her theories all the more meaningful; she observed them firsthand, almost in the style of an anthropologist vs a traditional economist.  Her real-world observation that The Tragedy of the Commons is naturally overcome through the shared efforts of communities. We wrote about Ostrom and her work in TNB and I had this in mind as I listened to pundits describe the SVB (and Signature, and FRB, and CSFB) bank runs as a Tragedy of the Commons. I think of the venture community as a relatively small and interwoven group with, if not shared values, at least overlapping ones. And while some VCs were calling for calm, the community as a whole acted in a panic, in what could have been a calamity for the entire industry (imagine a world for a moment where the Fed didn’t step in to secure depositors; even companies that got their money out of SVB would have been impacted by the collapse in the venture market that would have certainly followed that many companies and funds losing significant funds). This isn’t an indictment of the venture industry or any individual company or CEO who took money out of SVB in the lead-up to the meltdown. It’s hard to judge individual actions in that way. But it is important to look at our industry as a whole and ask why, in a world so interconnected, so tied together, and with communication so fast, that so many acted in their own (perceived) self-interest vs what was an equally clear path to collective action (or inaction, in this case). If you had asked me two weeks ago, I would have said I thought we would have done better. But perhaps my optimism was just naivety.

Effectively building and working with a board is a critical part of building any successful business. But there is a lot of nuance in doing both of these things effectively. Enter the second edition of Startup Boards: A Field Guide to Building and Leading an Effective Board of Directors by a trio of authors including my partner, Brad Feld; CEO of Foundry portfolio company Bolster, Matt Blumberg; and co-author of the original edition of Startup Boards, Mehendra Ramsinghani.

While the first edition was great, this second edition is a well-needed and excellent update (it’s been 7 years since the original came out). I had the chance to read an advance copy a few months ago and loved the practical information and important updates to the new version. Startup Boards is a comprehensive guide on creating, growing, and leveraging a board of directors written for CEOs, board members, and people seeking board roles.

 

The first time many founders see the inside of a board room is when they step in to lead their board. As I wrote in my blog series, Designing the Ideal Board Meeting, boards are often not managed well and as a result, are often under-utilized. Startup Boards looks at the structure, management, and best practices for leveraging a board to get the best from it. The authors have collectively served on hundreds of boards over the past 30 years, attended thousands of board meetings, and encountered more crazy boardroom drama than most. They’ve poured this wealth of knowledge and experience into Startup Boards. Importantly, this new edition emphasizes the importance of independent board members, diversity at the board level, and openness to first-time board members. 

 

In this latest edition of the book you’ll learn about:

• Board fundamentals such as a board’s purpose, legal characteristics, and roles and functions of board members;
• Creating a board including size, composition, roles of investors and independent directors, what to look for in a director, and how to recruit directors;
• Compensating, onboarding, removing directors, and suggestions on building a diverse board;
• Preparing for and running board meetings;
• The board’s role in transactions including selling a company, buying a company, going public, and going out of business;
• Advice for independent and aspiring directors.

Startup Boards draws on stories from board members, startup founders, executives, and investors. Every CEO, board member, investor, or executive interested in creating an active, involved, and engaged board should read this book—and keep it handy for reference. I hope you’ll grab a copy. 

Companies looking to raise money turn to venture capital for a variety of reasons. Top among them is generally access to capital, but often on the list is the hope that raising capital from experienced (and well-networked) investors will have other positive impacts on their business. Certainly from the venture perspective, VCs (Foundry included) pitch themselves to companies, co-investors, and LPs as more than just capital. Indeed, many firms even institutionalize the practice of providing help to portfolio companies through extensive platforms that may include PR, talent, marketing, technical, and other help (sometimes offered for free, sometimes offered ads a pay-for-service, but often at below-market rates for those services). There are venture firms that have dozens of people employed in the service of their portfolios. 

But how impactful is all of this according to the people who actually matter – venture-backed CEOs? The answer may surprise you.

Creandum’s recent article, Do VCs add value? tries to answer this question and, in the process, raises a few other interesting ones. “Most founders don’t feel they are getting value from their investors, even in areas like follow on rounds where they would hope to see specialized experience. They feel they can do better. 

Interestingly, and I suppose not all that surprisingly, VCs have a very different perspective on the value they’re bringing. The two graphs below highlight this across a number of different areas of impact.

I suspect some of this relates to expectation setting and how VC investors “pitch” themselves to prospective portfolio companies. But it certainly highlights the need for a deeper level of conversation between venture investors and their portfolio CEOs about where and how they can truly be helpful. Will they help you find other investors for future investment rounds? How do they make decisions about follow on investments? Do they want to be involved in operations of the business, recruitment of executives, etc? What level of support and expertise will you get from them and their network, particularly when things are rocky? 

And fascinating to me that VCs believe “brand” is the most important thing that they offer vs where it shows up on the CEO list (#5, behind things like ‘personal chemistry,’ and ‘network’). I wish the survey had broken out “brand” from “reputation” because I suspect the gap around brand alone is actually quite a bit larger (although I don’t think that will stop many firms from focusing on their branding and marketing efforts…). Also standing out from the graphs above is the gap between how much VCs think they’re helping with recruitment vs CEOs ratings of the same (69% of VCs think they’re making a significant contribution to recruiting while 79% of CEOs say that they’re not).

As in most things, focus can help. I suspect investors trying to do too many things for any given company is both unrealistic and in my experience generally not very effective. Pick a few things that you really need help with (they don’t – and shouldn’t – be the same for every investor or board member), clearly outline what help you need and what your expectations are, and focus. Regularly revisit these to track your progress and update your list. 

All of this highlights (again) why performing due diligence on potential investors is so important. We’ve just come through a market that was moving extremely quickly (too quickly, in my view). On the venture side, there was plenty to be concerned about in the need to make investment decisions so quickly. Overlooked was the challenge that placed on companies, who were making an equally important decision and entering into long-term relationships without the chance to meaningfully look into the firms that were courting them. Exacerbating this speed were valuations that in many cases were out of touch with reality, putting more pressure early in a company’s relationship with its new financing partners around company performance and trajectory. None of these dynamics allowed companies or their investors to form the basis for a longer-term working relationship. Hopefully, the new market dynamic will allow for more of this.