Jerry Neumann – Why Venture is Hard

**Patrick O'Shaughnessy** (0:04)
Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_1** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
My guest this week is Jerry Neumann. Jerry is one of the most thoughtful early stage investors that I've encountered and his writings at reactionwheel.net are my favorite on this topic. He applies an incredibly structured way of thinking to a notoriously mysterious investment category. This is our second conversation in which we cover why investing with one's gut is a bad idea and why some of the popular edges in startups like NetworkFX may be picked over. Please enjoy our conversation.
So Jerry, for round two, we will cover a whole lot of new things and even since we last talked a year and a half ago or whenever it was, a lot's changed in the world and the proliferation of venture capital is an interesting topic and just the number of people doing it has continued to grow. And so I thought it'd be fun to start there. You know, you mentioned when you started doing this, there was maybe 100, you literally counted venture investors deploying money into markets and now there's probably north of a thousand.
And this has a variety of implications for investors in these types of strategies and for the GPs themselves. And so I'd love to walk through sort of your take on today's venture landscape and the types of investments that VCs are making versus maybe the ones you're making and you think early stage investors should make. So we'll start there with just your high level thoughts on the proliferation of money and investors in this world and its impacts.

**Jerry Neumann** (2:03)
Ten years ago when I was starting to angel invest, I built a scraper. It would go out and look at the websites of venture funds and then it would figure out how they change, what companies they had added and tweet them. It was called VC Delta and a bunch of people followed it. It's kind of a geeky little project. It ended up selling it, so it's no longer out there.
But it was getting to be a pain in the neck because every time somebody started a venture fund, if you wanted to add them, you had to code them in. But I went through and I said, all right, first I put it in the 10 venture firms that I was closest to and then I added more. And I wanted to know what everybody was investing in. And I went through and I said, all right, who are the venture investors that are actually active? They're making more than a few investments per year. And I made a list and there were about 100, 120 of them in tech, not including the whole bio side, just the tech side.
And that was it. I was a little surprised by how few there were, but there were a lot more funds that were just not active.
Now I've read somewhere recently that there have been 800 new funds started in the past five, six years.
So that's a lot more than there used to be. And the interesting thing isn't so much the, obviously we know there's a lot more money and a lot of that money is at the top end, the late stage. But if there's that many more new funds, then almost all the people who are running those funds haven't been doing this for very long. They just can't have been venture capitalists five years ago. They must have been doing something else. So I wrote this blog post a long time ago called Heat Death about venture capital in the 80s. And there was a quote from somebody who said that more than half of the venture capitalists who are investing right now have been investing for less than two years. And he considered that a problem. So it's interesting to think if it's a problem. It's hard to know if it's a problem today or not. But the same sort of dynamic is happening.

**Patrick O'Shaughnessy** (3:44)
What do you think the most important implications of this are in terms of kind of what's getting funded, what founders are optimizing for versus maybe what they did when it was 100 VCs? What are the most tangible changes on both sides, the investor and the founder side that you've observed?