mike_maplesI love writing about stats in the venture industry because there are always two realities at play: The macro one and the one that actually drives the bulk of the innovation, jobs, and dollars in the industry.

I don’t care what the numbers are, the inherent reality of venture capital is that almost all of the returns come from less than 5% of the deals. And that inherent reality will always make the macro numbers misleading.

In scores of articles and posts I’ve written over some fifteen years that I’ve covered the industry, I’ve almost always argued there’s a reality camouflaged by the stats. Sometimes it’s why a seemingly great quarter for returns was actually a weak quarter if you took out, say, YouTube, Google, Salesforce, or Facebook. When I wrote about the Series A Crunch, I wrote that what looked like overwhelmingly bad news in the data ($1 billion evaporating!), would actually be good news for the Valley. I spent 2006-2012 arguing we weren’t in a bubble because the valuations of one or two companies couldn’t speak to the health of an entire macro-economic phenomenon.

Two weeks ago, I wrote about some numbers out of CB Insights that seemingly flew in the face of what everyone in the Valley was saying. The numbers showed that startups who raised seed money from deep pocketed VCs performed better than those who raised seed money from microVCs. I argued both were true because the microVC world had a bigger delta between good firms and bad firms than any other part of the market, and drove home the point with this post last week about Cendana’s new $88 million fund to invest in microVCs.

The money quote is at the end when Cendana’s founder Michael Kim says, “Venture capital isn’t an asset class,” he says. “There are only a handful of firms that matter and if you’re not in those, you just shouldn’t be in it at all.”

Perhaps that should be the next quote we cross stitch on a pillow.

Over the weekend, I got into an interesting email debate with uber-early stage VC Mike Maples about the nature of venture stats. It seems my previous posts sparked questions from limited partners he knows about whether microVCs are inherently doomed, and Maples decided to share his thoughts with me, along with them.

Maples is never one to mince words or sugar coat his views. He’s well known for his instance that the only companies that matter in the Valley are the handful of “Thunder Lizards,” that can become huge. He sees venture firms the same way as Kim: A few firms matter, beyond that, pensions and endowments just shouldn’t invest.

The back and forth was interesting enough, I asked his permission to reprint some of it here. From his email, emphasis added by me:

Ah…another analysis with “data.”

In general I agree with the following: There are too many seed funds. There are too many startups getting funded. There are also too many VC funds doing too many seed investments.  Most VC seed programs are a joke.  And don’t get me started on the accelerators other than YC and a tiny few others :-)

Where I depart from the analysis:  They continue to research the wrong questions, because they treat the venture business in a way that is too “macro.”  They over analyze the losers and mix their results in with the winners. So in this case they ask if a generic startup funded by generic seed/angel people is more likely to raise a series a than a generic startup funded by a generic VC firm. The problem with this is the framing of the question. There is no such thing as a generic startup, micro fund, or VC fund.  There are the small number of exceptions and then there is everyone else who fails for the most part.

My view of the tech industry is that it is an industry of exceptionalism. Period. The end. 

Will VCs as a category do well?  Probably not. But the very best will do great. I think the same is true of micro funds. Accelerators?  Same thing.  And I believe this is also true of startups – hence FLOODGATE’s whole culture around thunder lizards.

Whenever we do a data gathering project at FLOODGATE, it always starts with finding the patterns that drive *exceptionalism*. Any study that tries to draw macro conclusions about startups or seed funds or incubators or VC firms is doomed to be wrong-headed in its conclusions because the analysis lumps in the losers, as if VCs and startups can be characterized as a homogeneous lump. Why would I want to spend my time learning what failure looks like? They don’t understand that only by studying success can you really see what drives it and find the data and insights that matter.  They create a sense of false precision, but they don’t actually *reveal* anything.

If anything the studies show me that you have to be exceptional to win, and that the numbers prove that everyone else will keep losing. All they are really doing is arguing about the relative magnitude of how bad it is to be of a certain category of loser. And I don’t know what good that does for anybody other than to point to the fact that if you can’t get into the best startups or the best funds, you shouldn’t be investing.  But I would think that everyone but the most naive know this already.

Maples and I agree completely on most of this. Tech is an industry of exceptionalism, and that’s why it never scales the way people hope it will. For all the Nasdaqs and Googles and Facebooks there’s still roughly $20 billion that goes into the industry every year– a tiny amount relative to private equity largely.

It doesn’t get bigger, because it can’t. As is, only a small fraction of that money generates all the returns. If anything, you could argue venture capital could be leader and perform just as well. That’s a big reason a long, slow steady shakeout has been going on for more than 10 years. While some 700 venture firms are technically listed as doing business in the US, only 97 of them have invested at least $1 million for four straight quarters.

Where we differ is Maples finds almost no use for any macro data since it won’t reflect the part of the industry that actually matters. I argue that both realities matter…. they just matter to different people. They may not matter to Maples, but many people aren’t lucky enough to be his investors or his portfolio companies.

Without the macro data in contrast to what the top 5% of the industry is saying and doing, you can’t have a full picture of the venture world. And while that 95% may not be producing the lion’s share of returns and jobs, they represent real money that is coming from somewhere and the firms that many entrepreneurs turn to for hope that their ideas can become huge.

The divergence of the two is a necessary and constant reminder of why this industry can seem so easy but be so damn unforgiving at the same time. That’s why it takes more than cash to be “the next Silicon Valley.” As Maples articulates with far more authority than I can, cash is the least of what makes great venture firms work.

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