Dana Mead: Understanding Venture Capital [Entire Talk]

TL;DR

Venture capital channels money from endowments, foundations, funds-of-funds, individuals, and other investors into entrepreneurs pursuing large ideas with meaningful impact. Venture firms evaluate opportunities through focused practice areas, technology trends, geography, and market needs, while serving as one part of a broader innovation ecosystem that also includes lawyers, accountants, and auditors.

Transcript

Dana. Thanks, Tina. Hi. So, Tina has told me, so far this year you've had all entrepreneurs, is that correct? So now you get to talk to someone that sits on the periphery of the ecosystem around innovation because entrepreneurs in our view, certainly in our firm, sit right in the middle and are the most important part of that ecosystem. We sit on o... Read More

Key Insights

• Entrepreneurs are the central participants in the innovation ecosystem, while venture capital firms operate as support services alongside accountants, auditors, lawyers, and other specialists. Their role is to provide resources and assistance that can help entrepreneurs move ambitious innovations forward.
• Kleiner Perkins organizes its investment activity around three principal practice areas: digital technology, life sciences, and Greentech. Its digital initiatives emphasize mobile, social, and their intersection, while its other practices cover healthcare technologies and areas ranging from hybrid cars to the smart grid.
• Personalized medicine is the use of the right therapy for the right patient at the right time. The approach seeks to replace broad treatment assumptions with evidence that a particular drug or therapy is likely to work for an individual patient.
• IT-enabled healthcare services are a major life sciences investment area because technology can improve access, efficiency, and workflow. Teladoc connects patients with licensed doctors by phone, while Awarepoint tracks equipment, physicians, patients, and nurses inside hospitals in real time.
• Venture capital grew from approximately 100 firms and 1,000 venture capitalists in 1980 to roughly ten times those levels by 2006. Capital raised increased from $2.1 billion in 1980 to almost $30 billion in 2006, with $235 billion under management.
• University endowments helped turn venture capital into an established asset class by allocating a portion of diversified portfolios to it. Stanford and Yale were highlighted as influential examples, with proposed venture capital allocations of roughly 2% to 3% encouraging participation by endowments and pension funds.
• Information technology software was the largest venture investment category in the data presented, followed by life sciences. Greentech emerged during the mid-2000s and subsequently maintained approximately $4 billion to $5 billion in annual venture capital investment.
• California received about half of the venture capital invested each year in the period discussed. Other regions seeking investment included the Research Triangle, Boston, San Diego, Minnesota, and the Northwest, reflecting broad interest in recreating strong environments for entrepreneurship and innovation.

Questions & Answers

Q: What role do venture capitalists play in innovation?

Venture capitalists operate on the periphery of an innovation ecosystem whose central participants are entrepreneurs. They provide capital and support to help entrepreneurs advance significant ideas, functioning alongside accountants, auditors, lawyers, and other service providers. The investment firm described in the talk looks for large ideas that can make a difference and evaluates them through defined practice areas, technologies, markets, and geographic opportunities.

Q: What investment sectors does Kleiner Perkins focus on?

Kleiner Perkins focuses on three broad practice areas: digital technology, life sciences, and Greentech. Its digital work includes mobile, social, and the intersection of those fields through initiatives such as the iFund and sFund. Life sciences includes areas such as cancer and stem cells. Greentech covers opportunities ranging from hybrid cars to smart-grid technologies.

Q: How do venture capital firms choose investment themes?

The life sciences example shows that investment themes can be developed through a structured model rather than selected haphazardly. Kleiner Perkins combines core categories such as diagnostics, devices, and therapeutics with broader trends, technologies, and geographies. These include personalized medicine, healthcare consumers, neuromodulation, IT-enabled services, imaging, gene expression, cancer, stem cells, and opportunities in China.

Q: What is personalized medicine in venture capital investing?

Personalized medicine means delivering the right therapy to the right patient at the right time. The talk contrasts this goal with drugs that were shown to work across a large study population but may have benefited only about half of the studied patients. Investors therefore see opportunities in technologies that help determine whether a therapy will work for a specific individual.

Q: How can telemedicine reduce healthcare costs?

Teladoc demonstrates how telemedicine can connect patients with licensed physicians without requiring an emergency room visit. The company described had 150 doctors across the country and could connect a caller to a doctor in 20 minutes for a 15-minute consultation. The talk contrasts this service with an emergency room visit costing an insurance company $1,000 when a patient has a cold.

Q: How does real-time tracking improve hospital operations?

Awarepoint uses tags and a software layer to locate hospital equipment, physicians, patients, and nurses while supporting workflow analysis. If a patient is exposed to a virus or another inappropriate condition, staff would traditionally pull charts to reconstruct contacts and locations. The tracking system described can provide the needed information within a minute and a half.

Q: How did venture capital become a major asset class?

Venture capital expanded as university endowments and pension funds began treating it as part of a diversified investment portfolio. Stanford and Yale were identified as especially influential examples. Their approach proposed allocating about 2% to 3% of a portfolio to venture capital, encouraging institutional investors to enter the field and helping transform it from a boutique industry into an asset class.

Q: How did the economic downturn affect venture capital fundraising?

The economic problems of 2007 and 2008 significantly affected venture capital. Many endowments held substantial equity positions, so declining portfolio values made their endowments smaller. Some needed to sell assets to meet commitments and became less interested in alternative investments such as venture capital. In the year discussed, firms were on track to raise about $16 billion while investing about $28 billion.

Summary

This video is a conversation with Dana Mead, a venture capitalist at Kleiner Perkins. He discusses the role of venture capitalists in the innovation ecosystem, the areas of focus for their firm, and the process of investing in new ventures. He also talks about the growth and changes in the venture capital industry over the years and the unique characteristics of the innovation ecosystem in the Bay Area.

Questions & Answers

Q: What is the role of venture capitalists in the innovation ecosystem?

Venture capitalists sit on the periphery of the ecosystem around innovation, providing support services to entrepreneurs. They are like accountants, auditors, and lawyers, helping to move innovation forward.

Q: Can you explain what ventures Kleiner Perkins invests in?

Kleiner Perkins focuses on three practice areas: digital (including mobile and social), life sciences (with initiatives in cancer and stem cells), and Greentech (including hybrid cars and smart grid).

Q: What are some major investment areas in the life sciences practice?

In the life sciences practice, Kleiner Perkins focuses on areas like diagnostic devices, therapeutics, personalized medicine, and IT-enabled services. They have invested in companies like Teladoc for telemedicine and Awarepoint for real-time asset tracking in hospitals.

Q: Can you explain how venture capitalists get paid?

Venture capitalists receive a management fee based on the money they manage and a carry, which is a share of the profit made from successful investments. The management fee is typically a percentage of the managed capital (e.g., 2.5% of $100 million), and the carry is a percentage of the profit made from the investments ($100 million multiplied by the percentage share).

Q: What are the common entry points for venture capitalists?

There are three common entry points for venture capitalists. Some start with a good undergraduate degree, gain some experience, and get a graduate degree. Others start with a different level of operating experience (8-10 years) before joining venture capital. Some enter venture capital after 20+ years of operating experience, often after selling their own company.

Q: What are the three big buckets of activities for venture capitalists?

Venture capitalists spend their time on three main activities: looking at new investments, networking, and working with portfolio companies. The amount of time spent on each activity varies depending on the stage of the venture capitalist's career and the size of their portfolio.

Q: How do venture capitalists mitigate risk in new ventures?

Venture capitalists try to mitigate risk by identifying the major risks involved in a venture and finding ways to manage or minimize those risks. They look at technical and clinical risk, market risk, and management risk. Their goal is to solve for those risks before investing a significant amount of capital.

Q: What are some success factors for startups that Kleiner Perkins has invested in?

Some of the success factors Kleiner Perkins looks for in startups include passionate founders, large underserved markets, reasonable financings for both investors and entrepreneurs, a sense of urgency, and a focus on recruiting top talent. They also look for entrepreneurs who are focused on the big idea and making a difference, rather than just the exit.

Q: What advice do you have for entrepreneurs seeking venture capital?

Entrepreneurs should be balanced in their views, not afraid to talk about the risks, and show passion and optimism for their ideas. They should leverage their network for help and advice, be persistent, and focus on getting top people on their team. It's also important to create their own innovation ecosystem and surround themselves with people who are positive, enjoyable to be around, and excited about what they're doing.

Q: Why has the VC industry not done well in the last 10 years?

The VC industry has not done well in the last 10 years because there haven't been many three-year periods of high returns like in the past. The global financial crisis in 2007-2008 also had a negative impact. However, the industry is starting to improve, and there is optimism for the future. The scarcity of top tier firms has made it easier for them to raise money.

Q: What are the unique characteristics of the Bay Area's innovation ecosystem?

The Bay Area's innovation ecosystem has well-trained people, a capital infrastructure (including VCs and lawyers), collaboration, diverse populations, and a positive culture that encourages innovation and risk-taking. The proximity of people between 280 and 101 is also a unique factor that fosters collaboration and networking.

Takeaways

Dana Mead from Kleiner Perkins discusses the role of venture capitalists in the innovation ecosystem and provides insights into the venture capital industry. He explains the three practice areas of focus for Kleiner Perkins (digital, life sciences, Greentech) and the process of investing in new ventures. He emphasizes the importance of mitigating risk, the qualities of successful startups, and the unique characteristics of the Bay Area's innovation ecosystem. The VC industry has faced challenges in recent years but is starting to improve, and the Bay Area remains a vibrant hub for innovation.

Summary & Key Takeaways

• Dana Mead presents entrepreneurs as the center of the innovation ecosystem and venture capitalists as supporting participants. Using Kleiner Perkins as an example, he describes a strategy organized around digital technology, life sciences, and Greentech, with investments selected for their potential to address large opportunities and make a meaningful difference.

• The life sciences strategy combines major investment categories, including diagnostics, devices, and therapeutics, with trends such as personalized medicine, informed healthcare consumers, neuromodulation, imaging, gene expression, IT-enabled services, cancer, stem cells, and China. Teladoc and Awarepoint illustrate how technology can improve access, lower costs, track assets, and support hospital workflows.

• Venture capital expanded from a small boutique industry into an asset class as university endowments, pension funds, and other institutions allocated portions of their portfolios to it. Investment remained concentrated in areas such as software, life sciences, and Greentech, while California received about half of annual venture capital investment described in the talk.