Venture Capital and the Dark Side

July 14, 2009 by Andrew Shriner · 1 Comment
Filed under: Venture Capital 

Not such a long time ago in a Manhattan studio far, far away from Silicon Valley, technology legend Marc Andreessen in an interview on the Charlie Rose Show smiled as he acknowledged he’s “crossing over to the dark side.”

The three time entrepreneur and active angel investor, in partnership with longtime collaborator Ben Horowitz, has just closed a $300M first fund focused on technology companies in Silicon Valley under the shingle Andreessen Horowitz.

This is not the first time venture capital has been referred to as the ‘dark side,’ but the term has enjoyed a resurgence in technology media headlines of late as Mr. Andreessen has been doing the publicity rounds promoting the new fund.

Though the timing is fortunate for this author, the name Darth Capitalist is less a nod to Mr. Andreessen’s remarks but more an expression of a sentiment sometimes associated with an industry whose incentives and practices are often not well understood by entrepreneurs and the general public, alike.

Venture capital is not the dark side of entrepreneurship, it is an enabler of all that is right with capitalism and the pursuit of progress. As a successful entrepreneur several times over, Mr. Andreessen is intimately familiar with the challenges that can occur between investor and entrepreneur. The dark side is not venture capital as a whole, the dark side is the misalignment that can occur between an investment principal operating within a structure aimed at generating returns and an agent tasked with tactical execution.

As practitioners under such conditions, venture capitalists endure monikers ranging from the benign ‘vulture capitalist’ to the more worrisome inclusion in the “systematic risk” of the “shadow banking sector” by the SEC, Treasury and Federal Reserve. Of which the former is cute and perhaps occasionally justified, and the latter completely ridiculous.

The name Darth Capitalist is intended to be tongue-in-cheek–a little self effacing humor at a time when the venture industry as a whole is facing some tough realities apart from the challenges of day to day business. Near-illiquid markets for venture-backed exits and the closure of underperforming partnerships have all happened before–this is merely the ebb and flow that occurs in any industry.

The Rebel Alliance

In the summer of 2008, The Economist ran a cover story on the trouble with the LBO  industry complete with an illustration of a Magritte-esque anonymous business man in a suit marching off a precipice, BlackBerry in hand. The article spoke of big funds and even bigger egos leading to obscene valuations and oppressive debt loads. Certainly venture capital is guilty of the same crimes, less the debt and the suits.

Though such a picture isn’t flattering, it is unlikely that much will, or should, change at the macro level. The venture model is not broken, venture capital does not present a danger to the financial system, the industry is merely in a state of transition. Taking a step off the precipice into the unknown isn’t uncommon, but risk management is the name of the game.

In a letter to James Madison, Thomas Jefferson wrote, “a little rebellion now and then is a good thing.” Venture capitalists make their living by enabling such rebellions, be they technological (cloud computing) or social (Facebook). Shifts in market forces create opportunity for some while leaving others behind to circle the drain. Venture capitalists must learn to adapt to the realities of their marketplace, much as they would expect a company in their portfolio to do.

And as with any rebellion, opportunities for new entrants to make an impact are created. Mr. Andreessen, welcome to the eternal optimism of institutional venture capital, where managing the uncertainties of the rebellion and bringing light to the dark side is your new day to day responsibility. You have my permission to print “Marc Andreessen, Darth Capitalist” on your business card.

Tags: ,