Reading time: 5 – 8 minutes

Dan Primack of PE Hub passes along an idea on how to revolutionize venture capital in his latest post. The idea, given to him from an unnamed Boston based VC, centers around the partner as the core of the VC fund.  Partners have always been the core of a VC fund, right?  Right.  However, in this new model Primack suggests there aren’t really any partners to speak of.  Each “partner” would work on his or her own with his or her own pool of money provided by one (or perhaps more) LPs.

The analogy Primack uses to explain this new idea is that of a professional athlete.  VCs have been compared to professional athletes for a long time due to a number of similarities with both professions. In this case the similarity we’ll focus on is that VCs, like professional athletes, usually work in teams but are judged on their individual numbers.

The issue with teams both in sports and in the VC world is that the stars can get pulled down by poor team members.  So, the thought is, why can’t a star VC just go “one-on-one” and raise an evergreen fund  from one LP (or perhaps more) that only he or she will manage.  These star VCs can then sign contracts with their LPs  (3 – 5 years to start was what was suggested), take a salary of $1mm per year, get 15% of any carry and hire an assistant and an associate.

It is suggested that this new venture capital model would provide better returns for LPs if the star VCs remained stars and, even if those VCs dropped off, the LPs would lose less then they would have if they picked a losing fund with multiple team members.

Primack, of course, realizes there are some issues with this idea and lists them in his post.  Two of them caught my eye:

1. What about the fact that the partnership model encourages working together to figure out if the deals a firm is looking at are really the best deals? Partners, in theory, should be helpful in that they may have different points of view about a deal that the deal-leading partner didn’t think of, etc., etc.

Primack refutes this by saying that most modern partnerships operate within a quid pro quo of silence. i.e. Don’t knock my deal and I won’t knock yours.  I haven’t been involved in any funds other than DFJ Portage and we operate in a very collegial way and speak our minds freely. That said, I actually haven’t seen Primack’s argument in reality although I could see his argument being the case at larger funds.

2. Would LPs be able to pick the right individual VCs?

That’s a big question but if an LP is on top of the goings on of their VC funds they probably already know who the superstars in their funds are.

I think the bigger question really is: Would the superstars consistently perform?

I don’t have the data on this but I know my friends at Cambridge Associates do so perhaps they can carry out this proposed study for me (hint, hint).

My idea for a study is to look at data from as far back as one can until the present day and then use the data to figure out if superstars are consistent over a long period of time or if the superstars during one 5 – 10 period are the dogs of the next. My guess: they aren’t consistent over long periods of time.

I fixate on this particular issue for one main reason and that is the fact that even the biggest of the big name VC funds – the blue chips as it were – are inconsistent in their returns.  Some of a given firms’ funds are top quartile and others are bottom quartile and some are in between.

A number of the big guys have fund returns that look like a roller coaster and it makes me think that the superstars would not fare much better.

Another point along the same line of thinking is that the superstar VC may actually be a superstar due to his or her team.  This point is also highly correlated to the entrepreneurs VCs back in that the team (the entrepreneurs plus the folks they hire) is everything.  Entrepreneurs have to be great leaders but they also need to hire great teams around them if they intend on bringing their companies to the highest level. Venture capitalists may also need their teams to help the VCs perform at the highest level possible.

With all that said it seems to me that trying to move the industry as a whole to the individual model or the partnership model doesn’t make much sense.  What works will differ based on the individual.  Some folks work well alone, some with a team, and so on and so forth.  What we, as an industry, probably need to address is the following:

Too much money has been flowing into VC for a while now.

Because of this fact funds are too big to do what VC is supposed to do.  $100mm or less (maybe a little more in some cases) is probably a good size fund for true seed and early stage investing.  Venture capital just doesn’t scale well and perhaps we need to accept this as an industry.  This is an important point and one that still needs to be addressed.

I am continually thinking about how to improve venture capital because I think venture capital is vital to the creation of great companies and life improving technologies. It has become fashionable to argue otherwise and I am actually happy about that.  I relish the posts about the death of venture capital.  Why? Well, because I try to look at those posts as a challenge for us, the VCs, to do better.  We can always do better.

Perhaps this superstar VC idea isn’t the way to improve venture capital (although some folks could try the model as it may work for some) but I am sure that through all of the discourse we will have as an industry in the coming years we’ll figure out of a few things that will make venture capital better at doing what it is supposed to do: find and fund bright entrepreneurs and then help them to create the next generation of new technology companies that will move the human race forward (while also generating a great return for our LPs of course).