VC:VC Rising Tides, Ebbing Tides

"A rising tide lifts all boats" is a famous aphorism, much loved by observers of the financial markets, and duly applied by everyone to everything.

However, some folks beg to differ. A rising tide lifts all boats and so swamps the effect of the hard work of some of those boat crews. If the public markets are doing great, then a mutual fund manager who returns good results will be harder to distinguish from a manager who is letting the underlying tide do the work. Similarly, in the VC world, if startups find it easy to get to a fabulous acquisition or IPO (1999 anyone?), then a top VC fund is harder to distinguish from a fund willing to write checks to any entrepreneur who walks in the door. In fact, even the draw of big VC returns creates a rising tide that some say helps sink boats. Bill Helman is the Boston VC most notable for speaking out in these terms currently (see his quote in this article), and he follows in the footsteps of Ted Dintersmith of CRV and Paul Ferri of Matrix.

This all came into focus for me when I recently read this quote, attributed to Warren Buffett, "It's only when the tide goes out that you learn who's been swimming naked".

For top-tier mutual funds and VCs (same job, different markets), it is when the tide goes out that their performance shines. At such times most boats are sinking with the ebbing tide, or in these terms, the naked swimmers are revealed. However, the properly clad top performers still turn in rising results, which are distinctively the result of their own work (or at least self-made luck, I admit), and the value of investing with the smart money is shown.

My VC:VC posts compare the venture capital world with the venture cycling world of bikes and non-profits. What impact do the tides have over here? A non-profit with a strong and loyal donor base will not be left standing naked when the tide goes out, however well all charities do when it is rising. What makes a strong and loyal donor base is strong emotional resonance, great performance, or blind habit. Many people write the same check to the same charities each year (blind habit) and don't really focus on the why's or the how's. Emotional resonance is strong for many charities, especially the alma mater university, or the family synagogue or church.

Great performance is a fairly recent concern for donors and non-profits. Peter Drucker was one of the leading business thinkers to apply his discipline to the non-profit world. Jim Collins is another (see my posting on his contribution). Over time, as wealth has shifted to entrepreneurial business leaders, their metrics and performance focus is brought to bear to their charitable activities as well. For example, the Sage of Omaha (the very same Warren Buffett of naked swimmer fame) held back on his philanthropy until he found a cause that measured and prized great performance, the Bill and Melinda Gates Foundation.

I am not so tuned in to the timing of the tides in philanthropic giving, but there does seem to be a general trend towards measuring outcomes, and hence measuring performance, rather than just feel-good giving. At some stage performance measurement will lead to performance based giving, and then we will get to see who has been swimming naked.

One last piece of advice, on my VC:VC theme ... don't ride a bike in a rising tide.

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