identifying technical entrepreneurs who think in a totally innovative way and who need access to management teams, first and foremost, that we can pair them with. And we strongly believe that this is the biggest constraint in our industry—that the number of great entrepreneurs and innovative products does not scale with more capital.
X: Various partners at CRV have been making this argument for a while now, right?
JA: If you go back to 2001, you’ll see that we began to take a very vocal stance that the industry was overcapitalized. It’s bad for the industry. Venture funds should be small funds, partnerships should be small partnerships. The message was received, but the industry continued to raise larger and larger pools of capital. The reason, I think, was that there were investors who saw the returns from the venture capital industry during the tech bubble and thought that they were compelling and started looking at venture capital as an asset class—which we don’t think it is, or should be. Although the credit crunch doesn’t affect venture directly, it certainly affects the people who invest in venture capital, and as a result, the best thing that could happen to our industry is now happening, which is it is getting right-sized. It’s happening involuntarily—but how many things in the world happen voluntarily?
X: But didn’t CRV itself raise one of these gigantic funds back during the dot-com bubble? Tell the story about that fund.
JA: In the 1990s, Charles River had some of the best funds in the country, with massive outcomes. For a brief period of time starting around 1999-2000, we came to the conclusion that the industry was scalable—that what we did could be scalable. So we raised a $1.25 billion fund in 2000. At that time the capital was flowing very freely, and we were one of the top couple of firms in the country as far as results, so we were able to raise the money. But very quickly we woke up with a hangover and said this is actually the wrong thing to do. The partners here pretty quickly figured out that it was a mistake, and they gave the lion’s share of the money back in 2001. The fund was downsized and the money was returned to the LPs.
The argument we made at the time—because we had in some ways a contrarian view of what was happening in venture—was that our job as an early stage venture firm was to be well aligned with both our investors and our customers, the entrepreneurs, and that smaller was better for both sides. I’ll give you an example on the entrepreneurs’ side. We feel no pressure whatsoever to put money to work. If a project we start only needs $2 million, and the business model is working, and they’re doing everything in a very cash-conscious way, that’s great with us. We thought the best way we could demonstrate that and to get the best entrepreneurs in the world was by being aligned with them, and saying we will do the right thing for the company. On the LP side, we were also very clear. How many great projects do we think are out there, and how many can we be active around? We found that smaller was the clear right answer for us. It had always worked in the past. And since then, all of our funds have been almost the same size. If you look at the last three, they were $250 million, $285 million, and $320 million.
X: You just said that back in 2000—before the decision to return most of the money in that fund to the LPs—the partners at CRV did believe that the venture business is scalable. Why do you think they believed that at the time, and what changed?
JA: During the bubble, it became very easy to convince yourself of a lot of things. The data was all there—the mean time to exit was very short, and there was a nearly insatiable appetite for interesting technology companies. Because of it, you could step back and look and say, “I think there are things we can do to help this industry become scalable.” If you remember back to 1999 or 2000, there was a strong view around helping put together entrepreneurial teams and providing marketing services and business services. That incubator model was prevalent at the time, and that was replicated broadly. Also, everyone wanted to be an entrepreneur—so you had thousands of people knocking on your door with some pretty interesting ideas.
We’re not saying that venture capital cannot play a role in trying to spark more entrepreneurship. There are entrepreneurs in the far corners of the earth who have the attributes and the technical knowledge that make them really backable. But at the end of the day, this is a craft, and our view is that we can’t meaningfully change the number of fantastic, world-class enterprises that come out the other side.
X: Was the reversal of course back in 2001 partly a matter of the firm realizing that it just didn’t have enough partners to work with all of the companies that would wind up as part of a billion-dollar-plus portfolio?
JA: I’m not sure it was as much people-driven. I think bigger funds led to bigger partnerships. But that the same time, the mean time to exit in 1998 and 1999 was low—companies were going public nine months after they got founded, so people didn’t have the large loads per partner. There was a broad view that said we could add partners, and a lot of people came into the industry at that time, including myself.
X: What goes on inside Charles River that’s so hard to scale up?
JA: We like to do our own work. We are not a big-back-office kind of place. It sounds like a Smith Barney commercial, but we do things the old-fashioned way. We’ve got a very small team, and we do all of the primary research ourselves. There is not a single associate at this firm. Our view is that we’re like glass blowers; it takes a while to learn the craft, and even explaining it is difficult. You kind of have to watch for a while, and develop your own style, and every glass is different. It requires constant reinvention and new thought about processes. And we think that has to be done on a small scale.
X: If venture funds are too large right now, how do you think they’re going to get smaller? Will firms just raise smaller funds, or will they have to write off big portions of their existing funds as their poorer bets tank, or will a lot of venture firms just liquidate?
JA: It’s hard to predict, but I’ll do it anyway. I think that you will see a large downsizing in the number of firms over the next couple of years. It doesn’t mean that some firms won’t end up raising successful funds. But if you take a high-level look at the numbers, there are somewhere around 800 active venture capital firms in the country. And if you look at what percentage of those are really active—and the easiest way to measure that is by new deals per year—the numbers will show you that
