Swinging from the highest of highs in 2020–2021 to a new more cautious market in 2022, venture capital’s unpredictability can feel exhausting and challenging to navigate. This week on the Kauffman Fellows Podcast, Code Cubitt (KF Class 25), Managing Director at Mistral Venture Partners, interviews two incredible investors who have endured and thrived through many market cycles. Susan Mason (KF Class 2), Managing Partner and Co-Founder at Aligned Partners, and Phil Wickham (KF Class 1), Managing Director at Sozo Ventures, share how they’ve seen venture capital evolve over the years, how they’ve found success despite market shifts, and why they are optimistic about the future of venture capital.
This season of the Kauffman Fellows Podcast is produced in partnership with Mighty Capital. Together, we unravel what truly makes a great VC investor.
Aligned Partners Co-Founder & Managing Partner, Susan Mason, on the Evolution of Venture Capital
First up this week, Code welcomes Susan Mason (KF Class 2), Managing Partner and Co-Founder at Aligned Ventures. With decades of combined experience Code and Susan examine each aspect of investing to discover what has and has not changed as venture capital has evolved over the last 20–30 years.
On what has changed in venture capital during her career
It is very interesting to see the changes that have happened in the venture capital industry over the years.
“What’s changed in the last ten years is the institutionalization of venture capital. You see large, billion-dollar-plus funds and a structure that is much more like a company versus the earlier days of venture capital, where you had much more flat organizations and a group of individuals working with companies. In general, we’ve come now to a much more institutionalized approach to helping companies.
In the earlier years in venture capital, there was pretty much one business model around venture capital. Since about 2010, we have seen an explosion of many different models. Accelerators became much more accepted and have had some early success. We have incubators. The single GP fund was very rare in the earlier days of venture capital. We also have had the rise of emerging managers, the sub $65 million fund size category.”
On the consistency of deal flow
There is plenty of evolution in venture capital over the last 20–30 years, but some things stay the same.
“We were tracking the deal flow in the mid-90s because that’s one of the elements that you can track in terms of seeing the quality of deal flow and ensuring that you have a high quality level. We were seeing about 2,200 deals a year that more or less fit our profile.
Today, at Aligned Partners, we track our deal flow as well. For the last 12 months cycle, which we look at in every annual LP meeting, we had roughly 1,800 deals come in that fit our profile. We engaged with about 360, meaning we talked to and met with them. Then we invested in two deals.”
On what’s changed in the deal evaluation and due diligence process
Some due diligence and deal evaluation processes look the same as they did 30 years ago. Other aspects have evolved with the times.
“For our partnership, at Alliance partners, evaluation has been very consistent. We maintain that. It’s the approach that we did in the 90s. There are many funds today using more of an analytic approach. The network of the entrepreneurs is one of the data point characteristics that they’re analyzing before they meet or engage with a potential investment category.
It depends on how sophisticated the fund wants to be and how many deals they need to do on an annualized basis. Some of the seed stage funds writing $50,000 checks may have 200 deals in a fund. That’s a radically different approach to how you’re going engage in due diligence for a fund that might be writing a two million to five million, or more, check size. The due diligence process should be a lot more involved with that.”
On the strategizing in VC
The strategies in venture capital vary depending on the game you’re trying to play.
“When picking a vertical or stage, part of the strategy that you also have to decide on is the size of the fund as a GP group. It’s very hard to put a billion-dollar fund to work in a very circumscribed geography than one that could be international. You have to think through all the different sizes of your funds and the people that are best at deploying that capital.
Some funds have been successful at that. Sequoia Capital is one of them. You always have this umbrella GP group that oversees all the funds, but underneath them, they have specific silos within that, which execute within their region or stage. I think NEA has always had a mixed fund as well. There are different models out there that can be successful, but not always.”
Sozo Ventures Managing Director, Phil Wickham Building an Enduring VC Culture
Phil Wickham (KF Class 1), Managing Director at Sozo Ventures, joins Code to break down the elements of an extraordinary VC culture. Throughout the episode, they share how to grow talent, build a rock-solid culture, and focus on long-term success within a firm.
On the criteria for success
There are things you can adjust as you go and others you need to build into your foundation.
“We figured this out on the journey to Kauffman, but at the end of the day, business models are tweakable and fungible. They’re critically important if you don’t have a compelling business model and unit economics, but culture isn’t tweakable and pivotable. You must start out with a DNA of a deeply aligned culture, with all the characteristics of leadership and team dynamics where culture wins.
That’s common sense now, but I don’t think it was. I don’t think anybody was valuing culture. When we brought that into Kauffman Fellows in 2006, we were laughed at by the industry. It was seen as a bunch of Kumbaya or yoga gurus. We chew nails for breakfast. What’s this culture stuff? Now? Everybody’s doing it!”
On culture as it relates to fund building and firm building
Firms that can play the long game and build an enduring culture are the ones that will win.
“In terms of startup operations, you have a lot more flattening and empowerment for venture firms to succeed in the competitive dynamic we’re in today. They have to be more operational. They have to have clear deliverables. The advice I got from my mentor, my first day in the office; he walked in and greeted me, and then said to me “There’s your desk, there’s your phone, go do some good deals. I’ll talk to you in six months.” That’s how the business was done back then. Now, you just can’t do that.
You have to treat your firm as an operating company. The largest difference is recognizing feedback loops. Operators can know today, this week, this month, that they’re getting feedback and doing a decent job. This feature worked in my software, or I sold this much product. We know in venture that even a year doesn’t tell you much. It’s probably a four- to five-year feedback loop where you get a feeling that you’re doing the right thing. More things are getting marked up and are going out of business, but it’s that 10- to 12-year feedback loop. You have to adjust your operations accordingly. It takes a lot more faith in the people. Because of that, it puts more emphasis on culture than even in an operating company.”
On how investment culture has evolved
Gone are the days of the Gordon Gekko culture.
“It’s the dissolution of the information monopoly. In the 60s, if IBM walked into your hospital and said to buy this much stuff for this price, you just nodded your head, and you bought it. As that industry matured and other voices became more powerful, the network decentralized power and it shifted to the buyer, to the CIO. You can see it happened in medicine, where the shift went from the surgeon to today where we’re all told to own our own health care. You can see it in sports where it used to be the coach, and now it’s the players. These are all things where that awareness information creates a more level playing field.
For us, we know with the power-law distribution and investing that there’s a very small percentage of entrepreneurs that matter. They see that curve, and they think they’re one of those people. That gives them a lot of negotiating power and requires us to come up with product and service ideas to position ourselves to build track records of not just putting numbers on the board. We emphasize testimonials from entrepreneurs more than anything on our website because what else matters?”
On growing from inside for long-term success
For Wickham, there may be some truth to the saying that you can’t teach an old dog new tricks.
“If you look at the firms that are multi-generational in their succession, the people who lead those firms now were brought in pretty junior. Whether it’s Andrew Braccia at Accel, multi-generations at Sequoia Capital or Jason Green who is almost a decade ahead of us in building Emergence Capital. I’ve modeled a lot of what we do by doing what they’ve done, which I think is very special. They’ve been very thoughtful about bringing people in at the junior level and putting them through very rigorous training. They’ve proven that you can grow real talent.
You’ve got to build from within. I don’t think you can bring senior people in regularly. There’s just too much that could go wrong with egos and culture. You have to unteach so many things to bring people into the culture that I can’t think of an example of that being a very effective succession plan.”