Earlier this year, I had coffee with the chief investment officer of a large public pension fund. His fund doesn’t invest directly into venture (they have a fund of funds position instead), so my new CIO friend doesn’t usually get pitched directly by VC funds. He doesn’t spend a ton of time in tech circles either.
When he does dip his toe in VC waters, he gets culture shock.
“I have trouble understanding VCs,” he said. (I’m paraphrasing.)
By his estimation, people in traditional finance are easier to read. Their goal is to maximize returns—and the progress toward this goal is concrete, transparent, and measurable. It’s really easy to understand what an asset manager’s motivations are when you’re across the table from them in a professional capacity.
People in politics are also easier to read. Their goal is to build power and wield influence. So when you talk to them, you can assume that’s what they’re looking for in the relationship.
Of course, both characterizations are limiting—I know bankers who care about impact and at least one politician who cares about people (he’s my cousin, so I can vouch). But as far as sweeping generalizations go, I can see where CIO is coming from.
In sharp contrast to financiers and politicians, VC investors are slippery creatures. CIOs have a hard time decoding our language. Venture capitalists are asset managers, but we talk like superheroes. We speak in hyperbole and aim, unironically, to change the world. We are incessantly crushing it, even though our portfolios are laughably unprofitable. We sit on boards but dress in jeans and sneakers. We are herd animals who claim to be contrarian.
It’s hard for a CIO to judge how much of it is serious and how much of it is bullshit. And really, can you blame him?
We sound like this because of founders
I had a good laugh listening to that CIO, seeing this portrait of my industry from the eyes of one of its capital originators. But I do have a theory of where this language comes from, and why it’s mostly legit.
It starts with founders.
For most people, founding a company—the kind that scales massively—is an irrational choice. It’s extraordinarily difficult. You could be making way more money and working way fewer hours doing almost anything else. Chances are that you’re going to fail, and you’ll have a pretty miserable time of it in the process. You have the odds of success of a lottery ticket, except that this particular lottery ticket costs 100% of your time, attention, and resources.
Nobody in their right mind would do this for the money. There simply has to be a greater purpose. And for founders, there usually is: a problem they are compelled to solve. A mission they feel called to achieve. A chip on the shoulder and something to prove. Sometimes, they simply can’t imagine doing anything else with their lives.
Take it from an economist: These are all economically irrational reasons.
You literally cannot buy a founder’s time with stability and a high salary. It’s why founders rarely sound like mercenaries or power-hoarders—because they’re neither. They are motivated by something much greater. And to rational people like the CIO, it all sounds lofty, bordering on ridiculous.
Note, however, that this irrational exuberance makes for better, more resilient companies. It inspires angel investors and early employees, who forgo salary and stability for a dream. It keeps founding teams motivated for way longer than money alone does. Sometimes it even attracts customers and builds loyalty. Because a resonant mission takes you places that money alone cannot.
In other words: In our industry, irrationality is a feature, not a bug.
Venture is not a rational asset class
VC investing is also predictably irrational. VC funds are not capital conservation vehicles—they’re long-term illiquid, unpredictable, and alpha-seeking. There are thousands of other, safer ways you could be deploying your capital, so when you choose VC, you do it for the dream. To quote Recast Capital founder and managing partner Courtney Russell McCrae: “Nobody invests in venture to make median returns—we’re all aiming for the top, plain and simple.”
That’s what my CIO friend said, too. He said his company invests (a very tiny portion of its AUM) in venture because it is the only asset class that offers unlimited upside. It’s the lottery ticket of finance.
Asset managers sell a product to limited partners (LPs). VCs sell a dream. The same dream that founders sell to us.
And that is why we all sound a little kooky.
Not all VCs are equal
Last year, I went viral for saying that megafunds are no longer venture capital funds. My argument is that they’re investing in consensus founders and consensus companies—not in early-stage, high-risk, contrarian bets. Their largest deployments are into companies that are all but foretold to be winners—literally too big, with too many giant powerful stakeholders, to fail. The bulk of their assets are being invested later and expected to generate faster and more predictable returns.
In finance, they call this type of risk “beta.” It’s fundamentally different from the “alpha” risk you underwrite when you invest in day-one, early-stage, non-consensus founders.
These days, megafunds are making gobs of money on beta-seeking models. And it begs the question: Why do they still sound like VCs? Why do they want to hold on to the “venture capital” nomenclature, even when VC is a tiny proportion of their portfolio, just like CIO’s? What do they lose if they’re called something else?
It occurs to me that these guys fundamentally don’t want to be just bankers and stewards of capital—they want to be visionaries. Certainly, there’s a coolness factor, and the influence that comes with investing in the bleeding edge. But also, I bet you can measure the difference between banker and visionary by the size of their management fees.
For the record: I run a microfund, a fundamentally different vehicle and strategy than a megafund. I do not believe our funds should be analyzed together—they are fundamentally different assets, and warrant separate allocations, where you can compare like with like. If you’re an LP, you are making bad decisions if you bucket all types of funds into a single giant VC bag. You’ve been warned.
Boutique VC is an irrational choice, too
Speaking of irrational: Raising an early-stage microfund is an irrational choice, too. When you make all your money in carry, and very little in fees, you’re betting completely on the upside, the dream. In the short term, you could be making way more money elsewhere.
That’s why I see the same motivation among emerging venture capital funds—or “boutique VCs,” as the megafunds prefer we call ourselves—than I do in founders. Nobody chooses to do this for rational reasons. We do it for unlimited upside. We do it for mission or love of the craft. We do it because the future of technology and the future of humanity are all being written by early-stage startups and scientists and inventors and R&D labs, and we want to have a say in it.
I personally do it because it is the purest incarnation of the American dream—the idea that anyone can be the next founder to change the world, whether they’re consensus or not. This is what drives me. It’s why I immigrated to America in the first place.
I know now what I sound like when I say this. 😅
Maybe my pension fund friend is right to be confused. Maybe we do all sound like we’re full of shit sometimes.
But the reason we sound like this—the reason we talk about doing good and having impact and changing the world and making a difference—is because some of us founders and VCs actually mean it.
And we wouldn’t be doing this otherwise.
This story was originally published in Leslie Feinzaig’s Venture with Leslie newsletter.
