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be created very often by being only 10 percent faster, smaller, cheaper, etc. The advantages of the incumbent in the marketplace are too great to be only marginally better as the startup. The really great new company successes offered transformational ways of doing things.”
Of course, a great VC does far more than the above—those are just headlines of a sort. In addition to those four principles, says McCance, Greylock founder Bill Elfers instilled the firm with a culture/philosophy that he believes remains important today, 45 years later. Like the principles above, it also has four main elements.
“First is respect for the entrepreneur. He or she strives to be ‘best actor or actress.’ The VC…should strive to be ‘best supporting actor’ or, in other words, the best director the CEO has. Second, you must have a long term investing horizon. It takes a long time to build a great company. Third, have a compatible set of limited partners who embrace this time horizon and treat them as partners.” (Greylock, he says, long held quarterly meetings for its limited partners, and still meets twice a year with its LPs.)
“Finally,” he says, “make sure all interests are aligned.” McCance refers specifically to the fact that “Greylock has always had a budget-based fee structure, with arguably under market current income and above market carried interest.” Here we are getting into the more nuanced details of how venture firms work. You can read this post from Xconomist Paul Kedrosky that explains everything in fantastic detail. Suffice it to say that most venture firms charge an annual fee to cover overhead such as rent and partner salaries that is a percentage (typically 2 percent) of the total funds they have raised. Greylock believes this can create a misalignment of interests between the limited partners who invest in the firm and the general partners who invest the funds in startups by encouraging GPs to raise ever-larger funds and reducing the incentive to perform. Instead of taking a big annual fee up front, Greylock’s model is to ask the LPs to simply reimburse the firm for overhead but to charge a larger percentage of the profits generated by successful liquidity events, called “carry” in VC parlance. In a structure like Greylock’s, McCance argues, “the general partner’s interest and the limited partner’s interest are aligned. We get paid, not for gathering assets, but for helping create great companies.”
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