Most Venture Capitalists that entrepreneurs work with these days have never been entrepreneurs themselves. They have not had to take substantial personal risks. They are used to cushy lifestyles, fat paychecks, and existing brands that their firms have built long before they came on board.
Most VCs also do not have an investment thesis. They raise funds based on historical reputation, and tell their limited partners, “Trust us, we know what we are doing.” Again, they are selling the credibility of an existing brand. In contrast, entrepreneurs almost never get funded without an investment thesis. And, by definition, the brand is new.
In this series, however, we will be talking with Brian Jacobs, one of the founders of Emergence Capital – a relatively new fund that came into existence WITH an investment thesis, and quite a contrarian one at that.
I chose to do this story because I found it compelling as a case study of a venture firm that can truly empathize with entrepreneurs. I hope you enjoy reading it as much as I have enjoyed writing it.
SM: Give me some personal history, first, Brian.
BJ: I have been in the venture business for 20 years. I was initially an engineer working in the Valley and got into the venture business in 1988 with Security Pacific Venture Capital. When they merged with Bank of America, I was recruited to be the third partner at St Paul Venture Capital in Minnesota. I was there for 10 years and opened their Silicon Valley office in 1998. I was investing actively through the bubble period and then into the bust. It was in 2002 that I felt it would make sense to launch out on my own and form a new venture capital firm.
SM: What was going on in the industry at the time that made you want to leave a secure place and go off on your own? That was obviously not a great time for the industry.
BJ: The venture capital industry experienced a whipsaw effect where the huge opportunities in the bubble caused the venture industry to expand. New firms were created, and the established firms expanded to the point where they were much larger than before. St Paul Capital grew significantly and had a lot of access to capital through the insurance companies which were our primary source of funding. We were encouraged to grow and take advantage of the opportunity.
I participated in that growth; I entered as the third partner and by 2001 we had 12 partners.
When the industry started to collapse and the opportunities started to shrink dramatically, St Paul and many other venture capital firms found themselves overextended. I think we are still seeing some of those effects today because a lot of established venture firms have had to re-trench, downsize and in some cases have broken apart. A lot of venture firms were going through this soul searching in 2002 in terms of “what do we really want to do now that we have seen the unprecedented gains and flurry of activity and an unprecedented collapse in close succession?”
As a partner at St Paul, I was very much involved in those discussions, but I was getting frustrated that it was taking a long time to figure things out. I saw a huge opportunity in Silicon Valley and I recognized that my partnership could not take advantage of it because they were consumed with the restructuring needed from the bust period.
SM: When you are talking about the restructuring are you referring to large funds finding themselves in a situation of having too much money while simultaneously not being able to fund early stage investments and not being able to find enough late stage opportunities?
BJ: Certainly it is some of that. If you recall back to 2002, about 20 funds had raised over $1B. We were one of them. Our largest fund was $1.3B, raised in the year 2000. At the time we thought with the explosive growth we were seeing in the bubble it might be possible to invest $1B and return $10B.
By the time we hit 2002 it was very clear it would be extraordinarily difficult to invest $1B, let alone return $10B. The right size for a venture firm had to be dramatically smaller. If you were a firm with 12 partners, and at our peek we had over 90 portfolio companies, it was very difficult to change directions and go where we needed to be. I recognized that a quicker way to get well positioned for the new environment was to start something brand new rather than transform something that had grown for a different purpose during a different era.