VCs are underperforming with more than half not even returning money. Here’s three contributing factors.
Reason 1 – Motive & structure
VCs are programmed to think bigger funds are better. Partly because of ego, as higher AUM confers more bragging rights, but largely because of self-interest: they want to get richer on management fees.
This tyranny of size means they are set up to fail. Constantly chasing bigger funds and bigger deals, is like training to be a runner then switching to be a boxer. That’s not going to end well. It also promotes the wrong behaviours with perverse incentives to deploy capital.
And when did it make sense to tie your money up for 13 years (average life of a fund), with no say on what you’re investing in, and no option to not invest even if performance has cratered. The fund structure is a straight-jacket.
The Nickleby difference: We’re deal-by-deal so you get the control and discretion to choose what you invest in and take a holiday if your situation changes. There’s also much better liquidity. Meanwhile, we also focus on Series A, which is where the best risk-adjusted returns are made and because we have a repeatable playbook we know what challenges a scale-up is going to face and how to coach founders on best practice. Rather than focusing on hiring lots of staff and getting stuck in internal meetings (ego and distraction) we spend all our time with founders and investors.
Reason 2 – Calibre of people, lack of value-add and wrong incentives
We’ve met hundreds of VCs, investment directors, private bankers, wealth managers, investment bankers and general partners. Rarely have they built businesses themselves, few have the founder mindset and life situation that means they’ll do whatever it takes to be successful. Almost all live off a salary or are focused on management fees. Earning carry is impossible or unlikely. Given that incentives drive behaviour, they have little reason to be speaking to founders on evenings and weekends. And even if they did, founders wouldn’t want to take their call. They turn up to board meetings, make a load of demands and add very little value. Most of them struggle to even understand the detail of the companies they are invested in.
The Nickleby difference: Our founders combine operational and investment experience. Having built global companies from scratch and invested hundreds of millions we understand both how to build businesses and allocate capital. Our LPs are all top tier entrepreneurs and leaders who can open doors and lend industry insight.
Crucially, we have a very special relationship with our founders which means we can challenge and support them whilst play a hands-on role in helping to grow their businesses and solve problems.
Finally, we’re massively aligned with investors through our performance ratchet. We don’t make money unless we outperform the market, and this means we are laser focused on driving returns.
Reason 3 – They think investing is gambling
VCs expect most of their deals to fail! That’s so insane, it’s worth repeating: their whole philosophy is based on an idea that only 10-20% of their deals will do well. To compensate they need outsized winners to get the average up. This means they’re forced to go unicorn hunting and chasing bigger funds and bigger exits. All of this creates a drunken gambler approach: “this will probably fail, but it could be huge, so let’s roll the dice and cross our fingers.”
The Nickleby difference: As Gordon Gekko says in Wall Street, “I don’t throw darts at a board”. Instead of taking a flyer on a new deal, we actively look for the no. We get introduced to hundreds of off-market deals through our investor network and because we don’t have a fund, it doesn’t matter if we don’t do a deal for months. Our focus is on companies with intrinsic value and break out potential. Hope is a not a strategy and our priority is not to lose money. Instead, we want all our kids to go to Oxford. We back 1-2 new deals a year, and then we’re married to that founder for as long as it takes to make the investment a success.
In summary:
So…who do you think is going to make you more money. On one hand you have an employee focused on getting money out the door, that founders see as a necessary evil and that is hoping for a 1 in 10 hit rate. By contrast, with Nickleby you have a completely aligned owner, who is all over every aspect of investments, that founders love and where we work hard to make every deal a success?