Finding Signal in the Noise

There is a lot of noise being made in Silicon Valley today.  The dawn of the mobile era has ushered in a technological renaissance, in which machines held in the palms of our hands are reinventing every aspect of the way we live.  Recent high-profile IPOs from companies like Facebook and LinkedIn and billion dollar exits by a couple of upstart mobile apps have created a climate of exuberance not seen in the Valley for over a decade.  From Sand Hill to SOMA, anticipation of the next great tech boom is rising right along with startup valuations and housing prices.  For a 27-year-old fresh out of graduate school, it’s all very exciting.

Yet as anyone with a phone in their pocket can tell you, noise isn’t worth anything without a signal.  And we’ve heard this noise before, haven’t we?  After all, for every Facebook and LinkedIn there are thousands of startups whose contribution to the world never extends far past a launch event and an article in TechCrunch.  Amidst all this noise, how does a venture capitalist separate tomorrow’s great companies from today’s great follies?  And how does a 27-year-old fresh out of graduate school decide where to launch his career after graduation?

Any business school student would tell you to look at the data.  And being a recent business school student, that’s exactly where I started.  Here is one of the first things I found, courtesy of a guest lecturer in an investments class:

“A study showed that industries which were the top job choice amongst MBA graduates subsequently experienced considerable underperformance.”

The problem is that most of the data that MBAs typically rely on to make job decisions coming out of business school represent lagging indicators.  Just because an industry has seen explosive growth in recent years does not mean it will continue to grow explosively in the years to come.  If anything, history suggests a boom today often precedes a bust tomorrow.  Under these rules, “playing it safe” by following recent trends to make career decisions may actually represent a dangerous strategy.

As I was coming to this troubling realization, two important things happened in my life.  Wheelz, the peer-to-peer car sharing startup I joined as an early employee and worked at throughout business school, was acquired by one of its competitors.  And Trinity Ventures asked me if I was interested in a job interview.  All the data I had seen made me skeptical – as an asset class, venture capital had generated negative returns during the 15 year period from 1997 to 2012.  The prevailing wisdom among many of my classmates was that VC was a stagnant industry with little opportunity. Nevertheless, I decided to take the interview.

My first interaction with Trinity Ventures was a conversation with Larry Orr and Patricia Nakache, two of the firm’s senior partners.  I learned many things during that conversation that surprised me.  I was surprised to learn that Trinity had existed for 27 years and recently raised its eleventh fund, making it one of the most experienced venture capital firms in Silicon Valley.  I was surprised to learn that Trinity had consistently maintained its fund size at $300-$350 million over two decades of boom and bust cycles even though several of its funds had been oversubscribed.  I was surprised to learn that Trinity’s general partner to fund size ratio was higher than any other major VC firm, allowing it to provide better coverage to its portfolio companies.  Most importantly, I was surprised to learn that Trinity was founded on principles of hard work, collaboration, and dedication to building long lasting relationships with its entrepreneurs – values the firm maintains to this day.

I went through fifteen hours of interviews with Trinity during which I got to know every one of its partners.  Remarkably, I found each of them to have the same work ethic, collaborative spirit, and enthusiasm for entrepreneurial mentorship as Larry and Patricia.  The more I learned about Trinity, the more I understood how it managed to build such a successful track record without making a lot of noise.  The secret to Trinity’s success is explained by two advantages that no other firm can replicate: its people and its culture.  And the great thing about evaluating a firm based on people and culture is that they are both leading indicators.

In the end, interviewing with Trinity gave me answers to both of my original questions.  Smart VCs choose winning companies the same way smart business school students choose winning careers –by filtering out all the noise and focusing on the only variables that matter.   Sometimes that means taking risks by going against the prevailing wisdom, but that’s the business we’re in.  And if you have to wager your future on something, people and culture are a pretty good bet.

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