Everyone has to be a nerd about something. For some people, it’s math. For others, it’s baseball stats. For me, it’s venture capital. I may have been the only person who gasped last week when I read in my email that Mark Heesen– head of the National Venture Capital Association was resigning. “This is a huge deal!” I said.
Maybe it just feels like a huge deal to me– after all, I’ve laser-focused in on covering venture capital as an industry for nearly 14 years now. I’ve had good and bad things to say about it and the NVCA over that time, but there’s been exactly one constant: Heesen leading the industry’s advocacy group.
He’s shown a remarkable “low-touch” evangelism, as he explains below. He has focused the organization on picking and choosing the important issues– notably beating back the charge on changing taxation on carried interest a few times. But mostly, he focuses the organization on stats and research to show venture capital’s increasing job creation and lets those do the advocating.
No matter what you think of the NVCA, no man in Washington has likely presided over an industry that has seen more change and more of a rapid increase in importance over his tenure. Being a rabid Silicon Valley history buff, I caught up with Heesen last week to talk about how it’d all changed under his watch. Even as closely as I’ve watching things, I was surprised at a few of the things he had to say: including his observations at the lack of diversity, the fact that the venture industry has become more
geographically concentrated– not less, how many VCs have worked themselves out of a job, and the astounding shift in who is funding the venture industry.
It was such a fascinating chat, that I’ve published snippets of it below. If you’re a fellow history or venture nerd, you’ll love it.
Sarah Lacy: How’d you get the job?
Mark Heesen: It was the spring of 1991 and believe it or not I answered an ad in the newspaper. I wasn’t looking for a job, I don’t have a finance background, it was a total whim. I put my name in for a position in the NVCA– not the president at that point– and got it. I’ve been here ever since.
SL: Did you even know what venture capital was?
MH: No, not really. I kinda knew what it was. I knew it was a good thing. I think that’s how most people are, and I’ve been lead by that for 22 years. Sometimes you don’t need to overeducate folks. You want to leave a good impression, but you don’t need to inundate them.
SL: What was the industry like back then?
MH: One person referred to it as ”guild” and I think that’s the perfect description. It was a very small group of folks. You were pretty much invited to take part, and you mentored people who became part of that guild. It wasn’t a terribly open process, but at the same time, there weren’t that many people knocking on the door trying to get in. It was about a $5 billion industry with about 130 members and some of those names are still around. Also it was much more geographically dispersed. The folks in it were less technology oriented and more business oriented. And it was all white males.
SL: So that last part hasn’t changed much.
MH: That’s one of those sad things about the industry; it has not seen the diversity that other sectors have seen. What always shocks me is I go to business schools and go into the venture and entrepreneur classes and I look around and it’s 70% male. I ask how many women are in the business school and they say it’s more than half the class. It’s a self-selection process. It’s a fascinating– if sad– thing.
SL: When did it really start to change?
MH: Certainly in the 1990s when the IT sector became the darling of the venture industry. These life science folks have been tilling the field for 30 years. They are quiet and industrious and making major advances in our lives. They stick to their knitting and are not press savvy frankly. They aren’t Tweeting. When you look at the firms that have been around for decades, it’s frequently those guys. They’ve just been sticking their noses to the grindstone, quietly and successfully for a long time pre-1999 and after. They have had good times and bad times but because they have truly stuck to what they know, the numbers show these funds do just as well if not better than the IT funds. They have a lot of doubles and triples.
SL: Venture capital has changed so much in terms of size, profile, how it invests and where it gets its money from. What are the biggest changes to you?
MH: I think what you saw were really good returns that made pension funds in particular look at this asset class. Twenty years ago it wasn’t just public pension funds that were invested, it was corporate pension funds. We saw corporate pension funds get out now that everyone has a 401(k). You are seeing the same thing at the state and local government level now. That is a fundamental change that will continue and it’s one of the bigger issues for the industry going forward. What are our sources of money in the future?
Pension funds will play less of a role. Banks will play less of a role. It’s a finite group left. There are colleges and universities and foundations. That’s why you see so many firms going overseas. It used to be that 5% of the money in venture capital came from overseas; now it’s 25%. That’s a huge shift. VCs were hoping on planes to India and China to invest. Now they are hoping on planes to see their LPs.
SL: Wow, I had no idea the shift was that big. How will that change the industry?
MH: What we’ve talked about in theory for a number of years is reality now. There is a barbell of limited large $500 million and up funds that are stage agnostic and geography agnostic. At the other end are very small regionally or technology focused funds in the $100 million size. Someone in North Carolina only investing in life sciences companies, for instance. The middle-sized firms have gotten squeezed. They’ve tried to be all things to LPs. You can’t have an office in China and do clean tech and early and late with a $350 million fund. You gotta make a decision to grow– which is hard and you have to convince LPs you can do it– or you gotta downsize. Folks have either stopped operations or downsized significantly. I personally think it’s a warranted and appropriate downsizing in the industry.
The other big change in the last ten years is that in IT, entrepreneurs don’t need venture capital to create a company. Life sciences is different, financial services is different, but for the major area of our investment, we have worked ourselves out of a job. Our investments have brought the prices to start a company so low, it can be created and acquired without venture capital intervention. It’s increasingly difficult to invest in that space.
If that’s the case: Where’s the next area for investment? We thought for a while it was clean tech, but it looks now like that’s not the case. Is it agriculture? Space? Education. That’s long term what venture capital firms have to be thinking about.
SL: A lot of firms are trying to compensate for that by investing in later stage, particularly as companies wait to go public. But a lot of LPs hate it, because they don’t really consider that venture capital; it’s more like acting like a hedge fund. What are your thoughts about that?
MH: This goes hand in hand with the the idea that there needs to be an exit alternative to M&A or an IPO. As the runways get even longer, entrepreneurs are going to have a hard time trying to assuage investors and staff that they can wait 10 to 15 years to get a return. I don’t know if the Nasdaq and SharesPost deal is the answer. But more and more people are thinking about an alternative exit that still keeps the optio of an IPO and M&A open down the line.
SL: So you believe this is a structural problem, not a cyclical one?
MH: Here we are at record highs of venture investing and the IPO market is moribund. It’s become a system that doesn’t reward long term investors. Instead, it’s dictated by computer models trading on the seconds. That’s a concern to our companies who need long term investors. It doesn’t help the US economy as a whole.
SL: Should VCs focus on home runs or safe bets?
MH: We just had this debate yesterday. You’ll always have those who believe if I stick to it and don’t have a lot of losers and continuously hit doubles and triples, I’ll make my invetors happy. That’s all I need to do. Others say you need that grand slam constantly. If you don’t swing for the fences you won’t have that breakout technology that will wow the American consumer and really move the industry farther down the line.
SL: I see the same debate a lot in the Valley– with the way firms behave even if they don’t say it. Which side do you come down on?
MH: If I were IT oriented, I’d be looking at swinging for the fences. If you’re in life sciences you can stick to doubles and triples and do a lot of good for humanity and your investors.
SL: When I moved here there seemed to be such powerful franchises that could never be dislodged. But recently you’ve seen new firms come in and rise to the top rapidly. Do you think this is still a business dominated by core franchises or it’s become more dynamic?
MH: I think it speaks to a maturation of the LP community. They are much smarter. They look more at the individuals than the firm now, and a lot more is known of track records now. LPs understand the Kleiner Perkins of today is not the Kleiner Perkins of ten years ago. The people in the office are very different and you need to look under the hood before you invest. They are asking tougher questions. They aren’t just investing in the wow firms of today they are trying to find the wow firms of tomorrow. LPs are much more aggressive these days.
SL: What are the policy priorities for the industry that you are leaving for someone else to tackle?
MH: Well immigration is a no brainer and it has been held hostage for years now by the political vagaries of both parties. There needs to be a fundamental basic role of the federal government to do basic R&D. VCs will not have companies do this, and the Bell Labs of the world are truly gone. It’s incumbent on the federal government to play this role. Now, other countries’ governments understand this and are doing it. The reality is VCs will go where the entrepreneur is, not the other way around. They will follow them to China or India or Paris and the jobs will be created in those places. Returns will be created in those places. Most US VCs would love to see that all happen in the US, but they have a fiduciary responsibility to investors to follow them if they have to.