Responding to a popular request, we are now sharing transcripts of our investor podcast interviews in this new series. The following interview with Susan Mason was recorded in October 2015.
Susan Mason, General Partner at Aligned Ventures, talks about the dysfunctions of the broader venture capital model, and what her firm is doing to address those. Excellent conversation.
Sramana Mitra: Let’s introduce our audience to you and the model that you have come up with. The current mainstream venture capital industry, in my opinion, is spinning out of control. Let’s talk about your observations about what’s happening in the industry today and how you are doing something different to counter that.
Susan Mason: I’ve been in the industry now for almost 20 years, and it’s very interesting in the venture capital industry. If you look at 2015, it is on track to be one of the biggest years of fund raising and venture capital since 2000. We are back from an industry standpoint. You’re seeing significant bifurcation in the industry where you have these very large funds on the billion dollar plus category and a lot of smaller funds. Oftentimes what you see is that the first fund is small.
I would say that is the sub-$100 million category. Then it balloons back up to the larger ones. The challenge with larger funds is that the fund model is predicated on the outsized model where you have three or four companies in a portfolio of over 24 companies that will deliver the outsized returns. Effectively, everything else can go to zero.
The issue with that is, you have an inherent tension between the entrepreneur whose n = 1, which is his/her company versus a venture capitalist who takes a portfolio and their n equals 25 on up. The issue is the venture capitalist is driven to ensure that they can put more money behind the succeeding companies whereas the entrepreneurs are putting their time, energy, and lifeblood into the company and don’t have that portfolio opportunity.
Because my partner and I have been in the industry for a long time, we recognized a couple of things. One is this inherent tension of what is value of n on the opportunity to succeed. The second item is, starting around 2003 to 2004, the amount of capital needed to build the company. I speak specifically of enterprise-focused companies because we don’t do consumer-focused companies. For enterprise-focused companies, the amount of capital needed to build those companies at least to an exit inflection point has dropped dramatically. That opened up a number of opportunities.
We just thought, “Is there a way to build a fund that can effectively work, hand in glove, with the entrepreneurs so that you don’t have that n-equals disparity, but where you also can build a company that has an exit inflection point that fits the sweet spot for enterprise companies?” If you look at venture-backed enterprise startups, most of those exits are in the $60 million to about $150 million. That range may slide up or down slightly, but that’s really the sweet spot.
The challenge is, can you build a fund that addresses that and yields returns for the entrepreneur and the early employees versus having the outsized venture model? We built Aligned Partners around that capital-efficient model whereby our companies just need less capital. Typically, our companies take $12 million or less in total equity dollars to reach that sweet spot range of exit points. We have a number of examples in that category.