Yesterday, we had a chance to talk with longtime venture investor Brad Feld of Foundry Group, whose book “Venture Deals” was recently republished for the fourth time, and for good reason. It’s a storehouse of knowledge, from how venture funds really work to term sheet terms, from negotiation tactics to how to choose (and pay for) the right investment banker.
Feld was generous with his time and his advice to founders, many dozens of whom had dialed in, conference-call style. In fact, you can find a full transcript of our conversation right here if you’re a member of Extra Crunch.
In the meantime, we thought we’d highlight some of our favorite parts of the conversation. One of these touches on SoftBank, an organization that Feld knows a little better than many other investors. We also discussed what happened at WeWork and specifically the difference between a cult-like leader and a visionary — and why it’s not always clear right away whether a founder is one or the other. These excerpts have been edited for length and clarity.
TC: We were just talking about startups raising too much money, and speaking of which, you were involved with SoftBank long ago. Your software company had raised capital from SoftBank, then you later worked for the company as an investor. This way predates the Vision Fund, but you did know Masayoshi Son, which makes me wonder: what do you think of how they’ve been investing their capital?
BF: Just for factual reference, I was initially affiliated with SoftBank with a couple of other VCs; Fred Wilson, Rich Levandov and at the time Jerry Colonna, who now runs a company called Reboot. During that period of time, a subset of us ended up starting a fund that eventually became called Mobius Venture Capital, but it was originally called SoftBank Venture Capital or SoftBank Technology Ventures. We were essentially a fund sponsored by SoftBank, so we had SoftBank money. The partners ran the fund, but we were a central part of the SoftBank ecosystem at the time. I’d say that was probably ’95, ’96 to ’99, 2000. We changed the name of the firm to Mobius in 2001 because it was endlessly getting confused with the other [SoftBank] fund activity.
I do know a handful of the senior principals at SoftBank today very well, and I have enormous respect for them. Ron Fisher [the vice chairman of SoftBank Group] is the person I’m closest to. I have enormous respect for Ron. He’s one of my mentors and somebody I have enormous affection for.
There are endless piles of ink spilled on SoftBank, and there are loads of perspectives on Masa and about the Vision Fund. I would make the observation that the biggest dissonance in everything that’s talked about is timeframe, because even in the 1990s, Masa was talking about a 300-year vision. Whether you take it literally or figuratively, one of Masa’s powers is this incredible long arc that he operates on. Yet the analysis that we have on a continual basis externally is very short term — it’s days, weeks, months.
What Masa and the Vision Fund conceptually are playing is a very, very long-term game. Is the strategy an effective strategy? I have no idea . . . but when you start being a VC, it takes a long time to know whether you’re any good at it out or not. It takes maybe a decade really before you actually know. You get a signal in five or six years. The Vision Fund is very young . . . It’s [also] a different strategy than any strategy that’s ever been executed before at that magnitude, so it will take a while to know whether it’s a success or not. One of the things that could cause that success to be inhibited would be having too short a view on it.
If a brand-new VC or a brand new fund is measured two years in in terms of its performance, and investors look at that and that’s how they decide what to do with the VC going forward, there would be no VCs. They’d all be out of business because the first two years of a brand-new VC, with very few exceptions, is usually a time period that it’s completely indeterminate as to whether or not they’re going to be successful.
TC: So many funds — not just the Vision Fund — are deploying their funds in two years, where it used to be four or five years, that it’s a bit harder. When you deploy all your capital, you then need to raise funding and it’s [too soon] to know how your bets are going to play out.
BF: One comment on that, Connie, because I think it’s a really good one: When I started, in the ’90s, it used to be a five-year fund cycle, which is why most LP docs have a five-year commitment period for VC funds. You literally have five years to commit the capital. In the internet bubble, it’s shortened to about three years, and in some cases it shortened to 12 months. At Mobius, we raised a fund in 1999 and a fund in 2000, so we had the experience of that compression.
When we set out the raise Foundry, we decided that our fund cycle would be three years and we would be really disciplined about that. We had a model for how we were going to deploy capital from each of our funds over that period of time. It turned out that when we look back in hindsight, we raised a new fund every three years and eventually we lost a year in that cycle. We have a 2016 vintage and a 2018 vintage and it’s because we really deployed the capital over 2.75 to three years . . .It eventually caught up with us.
I think the discipline of trying to have time diversity against the capital that you have is super important. If you talk to LPs today, there is a lot of anxiety about the increased pace at which funds have been deployed, and there has been a two year cycle in the last kind of two iterations of this. I think you’re going to start seeing that stretch back out to three years. From a time diversity perspective three years is plenty [of time] against portfolio construction. When it gets shorter, you actually don’t get enough time diversity in the portfolio and it starts to inhibit you.
TC: Very separately, you wrote a post about WeWork where you used the term cult of personality. For those who didn’t read that post — even for those who did — could you explain what you were saying?
BF: What I tried to abstract was the separation between cults of personality and thought leadership. Thought leadership is incredibly important. I think it’s important for entrepreneurs. I think it’s important for CEOs. I think it’s important for leaders, and I think it’s important for people around the system.
I’m a participant in the system, right? I’m a VC. There are lots of different ways for me to contribute, and I think personally, rather than creating a cult of personality around myself, as a contribution factor, I think it’s much better to try to provide thought leadership, including running lots of experiments, trying lots of things, being wrong a lot, and learning from it. One of the things about thought leadership that’s so powerful from my frame of reference is that people who exhibit thought leadership are truly curious, are trying to learn, are looking for data, and are building feedback loops from what they’re learning that then allows them to be more effective leaders in whatever role they have.
Cult of personality a lot of times masquerades as thought leadership . . . [but it tends] to be self-reinforcing around the awesomeness that is that person or the importance that is that person, or the correctness of the vision that person has. And what happens with cult of personality is that you very often, not always, but very often, lose the signal that allows you to iterate and change and evolve and modify so that you build something that’s stronger over time.
In some cases, it goes totally off the rails. I mean, just call it what it is: what business does a private company have, regardless of how much revenue it has, to buy a Gulfstream V or whatever [WeWork] bought? It’s crazy. ..
From an entrepreneurial perspective, I think being a leader with thought leadership and introspection around what’s working and what’s not working is much, much more powerful over a long period of time than the entrepreneur or the leader who gets wrapped in the cult of personality [and is] inhaling [his or her] own exhaust.
TC: Have you been in that situation yourself as a VC? Could VCs have done something sooner in this case or is that not possible when dealing with a strong personality?
BF: One of the difficult things to do, not just as an investor, but as a board member — and it’s frankly also difficult for entrepreneurs — is to deal with the spectrum that you’re on, where one end of the spectrum as an investor or board member is dictating to the charismatic, incredibly hard-driving founder who is the CEO what they should do, and, at the other end, letting them be unconstrained so that they do whatever they want to do.
One of the challenges of a lot of VCs is that, when things are going great, it’s hard to be internally critical about it. And so a lot of times, you don’t focus as much on the character. Every company, as it’s growing the leadership, the founders, the CEO, the other executives, have to evolve. [Yet] a lot of times for various reasons, and it’s a wide spectrum, there are moments in time where it’s easier to not pay attention to that as an investor or board member. There’s a lot of investors and board members who are afraid to confront it. And there’s a lot of situations where, because you don’t set up the governance structure of the company in a certain way, because as an investor you wanted to get into the deal, or the entrepreneurs insist on [on a certain structure], or you don’t have enough influence because of when you invested, it’s very, very hard. If the entrepreneur is not willing to engage collaboratively, it’s very hard to do something about it.
Again, if you’re an Extra Crunch subscriber, you can read our unedited and wide-ranging conversation here.