Better not Bigger

When I started my first venture, I had no capital at my disposal. I literally borrowed $5000 from my parents to make my first investment. I was operating in an industry where everyone had more financial heft than me, even the micro-funds. My first set of prospective clients, all of whom took meetings out of courtesy, asked how an upstart with no financial base could compete with the big funds. I made the case that smaller funds were more nimble, more selective, could exert greater focus on the few businesses we were engaged with, and could care more deeply for the few clients that it served.?

I still believe in these tenants.?

That said, there was a part of me that realized there are limits to this mindset. You need to have a certain amount of capital at your disposal to lead financings, secure board seats, and have influence to drive success for the business. You have to have capital reserves to continue to support the business. And if the business is particularly successful, you may even need to have capital to invest in the IPO. I understood why startups went with established firms that had more organizational heft, greater resources, and a track record of success.

Now I am fortunate to be on the other end of the spectrum. We have billions of dollars under management. We’re on the board of directors of nearly all the businesses we’re engaged with. We have over 60 active portfolio companies and are consistently listed among the most active investors in our industry. These are all great assets for our businesses.

At the same time, there are limits to scale in our industry. In many respects, venture capital is still a cottage industry. Although there are huge institutions in banking that dominate the landscape, our industry is comprised of a large number of smaller funds. Sure, scale has its benefits. But it also has its drawbacks. Beyond a certain modicum of capital, you either need to scale your portfolio to include a very large number of businesses, or you need to shift your engagement to more developed businesses that can put larger amounts of capital to work. It’s just plain math.

At Northpond, we’re proud to operate three academic facilities at Harvard, MIT, and Stanford. With these facilities, we’re deeply engaged in translational research and developing new companies on the backend of scientific discoveries. This is a labor intensive, low throughput exercise that requires years of investment. The amount of investor capital required for this process is far less substantial than the amount of time and energy needed. It’s not the most scalable facet of what we do, yet it’s critically important to our mission. We have consciously decided to invest in these activities because our aspiration is not to become bigger—it’s to become better.

I think this is the ultimate challenge for all of our peer funds that have surpassed a certain threshold in capital. I will be quick to admit that I have made compromises in my own professional life that are a function of increased scale, compromises that have allowed us to become bigger. Now I ask myself, are these decisions enabling us to become better? Can we drive greater impact to science, medicine, engineering, and humanity by where we focus our time, energy, and effort? I love our industry. I love the fact that you can be a new entrant with relatively modest resources and carve out a value proposition that resonates with the market. I love that formative stage venture investing benefits from scale, yet also requires focus. It’s a balance that allows us to continue getting better even as we get bigger. This is how we can deliver the greatest value to our constituents and to society at large.