331. The Founding Story of NEA, The True History of Venture Capital, the Keys to an Enduring Firm Legacy, and Why the Best VC’s Dare Disturb the Universe (Chuck Newhall)

Chuck Newhall on TFR

Chuck Newhall, co-founder of NEA, joins Nick to discuss The Founding Story of NEA, The True History of Venture Capital, the Keys to a Building an Enduring Firm Legacy, and Why the Best VC’s Dare Disturb the Universe. In this episode we cover:

  • How NEA Raised Fund I
  • Memorable Fund Successes and Failures
  • Why Chuck Passed on Home Depot
  • Founder’s Brain Chemistry
  • Scaling Talent without Scaling Superstars & more! 

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Transcribed with AI:

The incomparable Chuck Newhall joins us today from Greenwich, Connecticut. Chuck is a decorated Vietnam combat veteran with numerous decorations including the Silver Star, the Bronze Star with two Oak Leaf Clusters for Valor and the Purple Heart. Chuck is also the co-founder of NEA which he founded in 1977 alongside Dick Kramlich and Frank Bonsal, since then NEA has funded over 2000 companies representing over 2 trillion in revenues. Chuck is also the author of four books, including his latest now available for pre order, with a formal published date on May 1 Dare Disturb the Universe: A Memoir of Venture Capital. Chuck, welcome to the show.

Thank you.

Chuck, it’s a huge pleasure to have you on today. You know, first of all, thank you, sir, for your service to this country. We could probably do a 10 episode series on your life. And we’d love to do so. But as this is a VC podcast love to dive right in. I know that your family has been in the venture industry for 75 years. Do you mind starting out with some of the history on the beginnings of venture capital and maybe talk about your father’s entry into VC in 1945?

Well, everybody thinks that venture capital started with Arthur Rock in 1970, and the California explosion of partnerships that occurred around that time, that really isn’t true. Venture capital is a very old business. You can go back to Phoenician trading companies in 2000 BC, that had at 20 deals with the crew that ran the ships that went from the Mediterranean to England, and they had a carried interest to you can go through all the great exploration like Marco Polo was really adventure deal, and Christopher Columbus, and then you really get into more recent history. Harvard Business School has done all sorts of work on the incentive systems in the way that whaling vessels for run, and the merchant banks were run, and they basically provided an incentive to the managers and people who provided the capital were investors with protections than in 1880. Andrew Mellon does for seed investments, Gulf Oil, carborundum, general reinsurance and Alcoa aluminum. Then you go into the angel investing, Lucius Ordway, an angel helps to start the three M Company Sherman Fairchild helps to start IBM and the Rochester endo Angel splint a guy by the name of George Eastman to create the camera business Bessemer securities of the FIPS family was launched in 1906. Pace and interest Joan patient, one of the first female venture capitalist was 1930. Lawrence Rockefeller got into the business in 1938. By the way, he funded this guy that made sunglasses for airplanes, and he had 78% of that company. But the idiot who was running it decided to get into the camera business. So Lauren sold 78% of Polaroid for repentance. That was the instant camera. He didn’t make many mistakes. But he did. It was a big one. Wow, Warburg Pincus 38, 46, for general Daurio, and American research and development. And then I go into a California explosion in their 60s and 70s. So it’s an old business, it’s been around for quite a while, and recourse in the past 30 or 40 years, it’s gotten a heck of a lot of publicity.

So the Arthur Rock era is that when the modern sort of GP/LP structures sort of evolved to what it is today?

No, I would say evolved well, before that it evolved in the 40s. That’s when Lawrence Rockefeller Associates was started and they started giving carry, it was not a widespread universal practice like it is today. I would say you’re right in the sense that when institutional venture capital arrived, where you started raising significant sums from investors that were not family, that’s when you you started to get that traditional 80/20 deal with a 2% fee.

So did your dad start training you young in the ways of early stage startup investing?

I can remember one of the companies he financed was reaction motors, which is now called firecall, did pioneer the aerospace industry, a guy by the name of Chuck Yeager used to come to dinner, and he flew the rocket that reaction Motors had built Edward Teller who was a noted World War Two hero and scientist, one of the great scientific brains. So I grew up just like my sons being around incredibly incredible CEOs and scientists from time to time. I’m, even though I had little idea what they were doing.

And in your own history, Chuck, you know, I read that early on in life your grandmother sent you to military boarding school, you’ve mentioned that there you learn that the necessity of having three plans. Can you describe these three plans of attack?

Yeah, sure, one of the enemy comes from the front, one, if the enemy comes from the back, and one if he comes from the sides, and you always when you’re starting a company, I go through that little story. Because you never know when you’re gonna go into a meeting, and some events gonna happen that will totally disrupt maybe even the direction of your company. So you have to be thinking about those types of changes, which could come up all throughout life.

You’ve also served in Vietnam, a very distinguished service, where you fought in the Battle of Hamburger Hill. I don’t want to trivialize your service, you know, in the context here, but any key lessons that you’ve pulled from that experience that have really informed your career in business and venture capital?

Well, I guess that’s where I decided to be a venture capitalist. So we were actually doing the reconnaissance for what became Hamburger Hill, the bloodiest battle of the war. And I had been at the University of Pennsylvania. I wasn’t a scientist, I was an English major. And I studied the romantic hero. Well, what is the romantic hero in literature? To me, he’s an entrepreneur, someone who dares to disturb the universe and do something unconventional and really changed the way the world is. And so we were on this mountain, and we were really getting beaten up, I’d lost about half mine, Ben, we really needed to close in air support and overhead. The bombers that were coming in from aircraft carriers, were being refueled by the system that my father’s company made, which was basically the only system in the Air Force at that time, that allowed close in refueling a fighter aircraft. So I said, what could be a better life than being a venture capitalist, where I’m around romantic heroes. And every day I get to help change the way the world is, and do important things. And that’s how I became a venture capitalist sitting on a muddy hill.

Amazing. After graduating school, you went to work for T Rowe Price at the New Horizons fund. You know, at what time did you decide to kind of break off and start NEA?

Oh, T. Rowe had hired to get me into the venture capital business. And so I’d spent six or seven years getting a partnership agreement. Through my father, I knew everyone in the business at that point in time. And I had a good idea of who I wanted to have as partners. Of course, that never works out that way. But then the energy crisis occurred and T Rowe Price was going to use all the money it was going to put into starting a venture fund into buying out retirees. So all of a sudden, no venture capital for T Rowe Price, but there still was venture capital for Chuck Newhall. And I went to the fellow that was going to join me in the T Rowe Price venture fund, very accomplished venture capitalist. And he said, No, without that sponsorship, I’m not in. And so we had to go back. And actually things that seem bad at the time, when you look back on them usually turn out to be quite good. And having those people back out as my hope for partners led me to Deke and Frank, who have been the best partners I could have had in my life. So that’s another thing whenever a catastrophe happens, look for a way to turn it into a victory.

You partnered up with Frank first, is that correct? And then how did the three of you come together to form the firm?

Well, Frank had always been a partner at Alex Brown and really got him into the small company, underwriting business. They were Alex Brown was one of the four horsemen that took all the venture deals public. And he and I worked together. Now at T. Rowe Price, Harvey was my boss who ran the New Horizons on and he introduced me to his very good friend, Dick Kramlich because some of the companies that Dickens sponsored as a venture capitalist when they went public, and they knew each other well. So I spent also, Frank was my first wife’s cousin, second cousin. And so I known Frank for maybe 20 years, and I’d known dick for 10. And so we’ve all worked together. I invested in some of the X companies too. And I would see Frank around Baltimore, and I’d see Dick when I went to the west coast. So we were known entities to each other.

Tell us a bit about that. NEA fund one, you know, I’d like to hear what it was like to raise a venture firm or a venture fund rather in the late 70s.

Well, I think you’ve experienced Some of that the way I would describe it is very painful. It took us over a year to do it. We were without salary. My wife was wondering what the heck I was doing with all the money that I’d saved, which was rapidly going out the door. And I think we had to call on Around 1400 people to get about 30 investors. And so it was a time of rejection after rejection. Now, you have to remember that while this was going on, the energy crisis had occurred. And Newsweek and run Article of the cover of which was our equity is dead. And so a lot of people didn’t believe in equity investing much less venture capital. And a lot of people didn’t even know what venture capital was. What happened in the fundraising is the people who knew us the best were the ones that provided us with our capital T row. Of course, it’s funny when an employee leaves and T Rowe puts a million dollars, all their money that was going out to buy out retirees a million dollars, at that time was 17% of T Rowe Price his net worth. Now it’s, you know, I don’t know billions and billions of dollars. I had a close relationship with the head of mela Porter, that head of Loctite. These were companies which I’d fallen at T Rowe Price. John Harlan check printing company, and the CEOs of those companies all felt that it was a time to support new enterprise. And you have to remember there were people, it was, I think, in 1975, that only $16 million was raised for public offerings of venture backed companies. Wow. So it was dark times. And we ended up getting some incredible support. Frank had a relationship of fellow who was on the board of ion a insurance company in North America. His name was Ezra Zylka. And he introduced us to John Modell, who became our sort of biggest, I call it institutional investor. Now remember, I’d already before really Frank or Dick are in, I had brought in T Rowe Price, and the Deere family with about five and a half million dollars. So we had maybe a third of our money raised or a little more of that, because the Roberts family of DeKalb were all friends and they came in for a half a million dollars. So we had call it 35 40% of our money raised when we went out the door, which by the way, is one of my first rules of fundraising. But then he a we always had a board of directors. And basically we’d have in most cases 70% of a fundraise before we started fundraising from our leading investors who were very close to us.

And what was the size of that first fund, Chuck?

$16.4 million. That I used to know it down to the penny.

Do you recall how many investments you made from that fund?

I would say around 34.

And was it primarily east coast?

Oh, no, we were bicoastal. From the very beginning, we didn’t have a partnership headquarters. And we were out there all the time. And he was on the east coast all the time. So we were very much a part of the California scene. Now what we did, I love to point out stupid things we did. We brought in all the money in day one, instead of doing on time calls. Sure, our rate of return at the partners was 46% compounded annually, withdrawing all the money in the beginning and investing it over nine years. So if you really want to look at it on a just in time basis of drawing the capital down, the rate of return would have been well north of 100%.

Tell us more about the early years of the fund in the firm, you know, what were some of the big lessons and evolutions that you went through and sort of those those early days.

Well, of course, what we were out to do was changed the way the world is in start really important companies. We just didn’t want to start, call it the latest.com company haven’t go public. We wanted to make really big companies. But we missed a lot of things. And I’ll tell you one story about a company that we missed. I had this friend by the name of Ken Langone, and he had basically helped start Ross Perot, and was a very noted investor and he bought me this deal. A little company in Atlanta that was a retailer had a new format for doing things. He really wanted me to invest. And I really wanted to invest. But I knew nothing about retail. So a frank in particular wanted me to hire two experts to do the deal. So I brought in One from an operating ground one from an investment background. And they said, Don’t do it, this company is crazy, that are going to make their first move to California rather than someplace close to him and the leases, which they have, they’ll never be able to duplicate. So I turned down home depot at a $10 million pre money value. And I learned that sometimes experts don’t know everything they’re supposed to.

It’s gotta be the right expert, right with the right mindset. Otherwise, they might be bearish on anything.
But there are 100 lessons there to learn. One of our early investments was a little company called forethought. So I learned about the importance of having the right partner, and having the right expertise when you’re making investments with Home Depot for thought, told me the value of Never Say Die, never admit defeat. So Dick had invested in this little company, software company, and it was started by a businessman. And then by a quasi techie who was also an English major, the company’s first product blew up never sold a thing, they were working hard on a second product, and NEA refused to finance this company. So Dick said, I’ll finance it on my own. We had a provision that if you do that, the partnership gets to buy you back, if you make any money at all. So it wasn’t he was just doing this to make sure the company worked. He financed it to the tune of about 60 or $70,000, for eight months or nine months, which was real money, then, and Microsoft bought it. And the products name was PowerPoint. Wow. And so you know, when these companies get into trouble, and God knows I’ve had trouble, you really have to do everything, you can break your back to help them make it in survive, I can remember basically having to move to Boston for five months to try to save one company, which didn’t work out.
What advice would you have for the investors in the audience with regards to you know, managing the portfolio? And, you know, really driving driving your winners and driving success of the overall fund return?

Oh, boy, that’s a question of portfolio management. So first of all, you have to have, I believe, diversification, at least in a fund like any A, and you can even have diversification in industry focused funds, as well by lifestyle. But I always preferred diversification by industry. And then by stage of company, NEA was predominantly startup investing. But we got known as a late stage investor, because for every dollar you put in a startup, you have to put in eight on top of it. So we had proper diversification, I guess, the other thing you have to do is pick the right people, which is very, very hard. And pick the right fields. I always said there were two things. One was management and the other one was fertility of the field that you’re going into you want to get what field for primary demand is growing rapidly. Now, that isn’t true when you’re doing an industry consolidation, like I did in a lot of my healthcare service investing.

So, you know, while we’re on talent, I’d love to get your input on talent within the firm, not just within the portfolio companies. Can you talk maybe a bit about any A’s culture at that time relative to other VC firms and how you thought about bringing in talent and developing that talent?
Well, we weren’t looking for the people that wanted to make a quick buck. Our fee structure was 1%. And our carry was starting out 25%. Mathematically, fees are what to darier rate limited partner rates of return, not carry carry comes at the end of 10 years. I don’t want to go into a long mathematical structure. But because we had a 1% fee, he’ll have to remember some of our competitors in those days had 3% fees or higher. We weren’t paying high salaries, but we did give high carried interest. The other thing we did was the younger partners in the firm got three times the carried interest that they would have gotten had they gone with one of our competitors, and are carry profits interest was split much more broadly. So by the third partnership, the three founders had given up 70% of the firm and other partners he joined. I can name partnerships that have gone into the 10th partnership, and still had 70% of the profits owned by the founders. So we split it very broadly. The next thing it was a true partnership, and we would bring up ideas, debate them vigorously. But at the end of the day, it was not a single individual who made a decision. It was the partnership that made the decision. And that is quite different from the way a lot of people operate. So we had shared rewards and very much shared goals. From the very start. We wanted to make 100 year partnership, we used to talk about that in our front of our Investment Committee, which functioned as a board of directors, and I’ll get into that later. And they thought we were nuts. You know, you have a $16 million partnership, you got three terminal partners, and you’re talking about 50 years from now and what you want to do, but we had that goal. The other thing we did was governance, everybody needs governance. Very few people in the venture capital had it then and had it Today we had a, quote Investment Committee that really functioned as a board of directors, and they would approve our salaries, we would go to them in the event, we were going to hire or fire a general partner. They were very much our partners and really functioned like a board of directors now that is evolved to an advisory board now. And then from the very start, we had a team and Frank Dick and I each divided up the industries and I took healthcare and Frank van Dijk took the technology sectors, although they made some investments. We were all generalist in those days, early days.

Chuck, what would you say distinguished the very successful partners from those that were less so?
Well, I think you have to develop an industry expertise. So that’s one thing. I just think any question of ethics bounces someone out of the partnership. And we had turnover don’t have everyone thinks of any A is low turnover. And it was low turnover relative to a lot of people in the industry. But we confronted a lot of very, very hard issues, where we found people that didn’t have shared goals. So when you bring someone in 28, they had to be willing to work at a salary that was sort of mid range. And they had to be willing to have objectives that were sort of 10 year objectives. And the other thing was you didn’t get promoted quick. So the route to general partner, in the old days used to be 6, 8, 10 years, because you’d have to have proven your investment results. And we had levels eventually of gains that had to be achieved to reach each level of partner or advance in your career throughout the firm.

Chuck, as you reflect on the various funds that you worked on, and produce returns with do any standout, as you know, exceptional successes or failures. And and can you tease out some of the reasons for why the funds worked really well or not?

Well, easy on the failures, any a nine was a bubble burst fund, the fund right before 1999, before the bubble burst, and we invested it in a year’s time. And we were caught up in eyeballs and other things like that. And as a result, what used to be the way you used to value companies. You know, I go back when biotech was the hot industry, you know how people valued companies at that point in time. I don’t the number of PhDs that the company had working, you know, and then during the internet boom, it was eyeballs. Well, we started to believe we could drink our own bathwater and invested in a company. And we’ll make money in that partnership, I believe, but it has been a long, hard slog and in return is miserable. Now, where did we really start to click? I would think it would be any a five. And what happened between any a one and four is we tried some experiments. We started some affiliated funds around the country, because we wanted like a seed fund in Dallas, Texas. And we wanted a industry focused fun for defense electronics, and one of our limited partners because they really functioned as a board. Tom judge from AT and T at our one of our board meetings came in and said you have too many things going on too many industries, too many partners, too many distractions. So focus. So what we did starting in five was technology and healthcare. We wound down the affiliated funds, and we you know, stopped investing in financial services and some of these other areas which were not our core strength of our partner group. So focus focus focus. That fund really took off.

How does a large multistage multisector funds back focus with all these different strategies and different Geos across different technologies and sectors.

I think in essence, the way you do it is you have a member number of sub partnerships. I had the health care service team, which consisted of about four or five people, that it was a device team, a biotech team. And usually that team would propose something, it would have to get through the health care partners first, and then it would go to the whole partnership. So by the time that happens, the whole partnership is going to take the team that proposes its recommendation, because they’ll have already known it’s gone through about two or three sibs.

Chuck, can you talk about sort of the brain chemistry that you’ve noticed in successful founders?
Well, I spent a lot of time looking at Central Nervous System companies. And I was particularly fascinated by the roles of neurotransmitters. And these are the chemicals in the brain, that are the bosses, they give the orders, and kneel after nephron to serotonin to the release of dopamine is common with three I call them mental conditions. I’ll start with the most extreme, that’s a mental condition of bipolar people. It’s a mental condition of ADHD, which NEA has a surprising number of Attention Deficit Hyperactivity Disorder. But we have that Neo reference to serotonin, dopamine. And then finally you have the hypomanic, and the hypomanic is someone who is maintains a high level, if you say this straight line is normal, well, they sort of bounce above normal, they don’t sleep much too busy all the time. They’re very enthusiastic. And they have that same brain chemistry. And so I have found, in my experience that 80% of the entrepreneurs I find for fall into one of those three categories. And I have most people who do Psychiatric Research, agree with me, it’s harder to get other venture capitalists to agree with me, they think I’m sort of nuts and I’m out of left field. But they’re wrong.

Full regardless of the analysis and what the data says, it certainly takes a unique person with a very unique mind to take on the challenges of building multibillion dollar companies. Those people are not normal. And they’re a thrill to work with. From my standpoint. I mean, the founders are, it’s like nothing else you learn every time you interact with them. And it’s a very exciting profession. But they’re certainly above that baseline. No question.

Yeah, I think the real thrills of the business, I think venture capital is the closest thing to combat that there is in business. And venture capital is about the band of brothers in the Band of Brothers is what small unit tactics are in the army. The other thing, I go back to the romantic heroes, and they are fascinating people, and they do change the way the world is. Their business name is entrepreneurs.

You know, while we’re discussing sort of combat analogies, what do you think is the Achilles heel of most venture firms?

Let me give a quote from Jim Swartz that I have in my book, most people forget this basic lesson. From Jim, venture capital has always been about helping a person or project succeed. It is about adding judgment perspective and selfless desire to see a company succeed. Venture capital is best practice as a calling not a job. It was never about maximizing wealth, venture capital must be practiced with absolute integrity and ethics. I think a lot of people forget that.

I think you’re right. I think you’re right, sir. And while we’re talking about the book, dare to serve the universe comes out formally, this may it’s available for preorder. Now, why did you choose to write the book?

Well, I thought the story of venture capital had not really been told, as you allude to the history that people don’t know it’s not older business. But I also think they tend to lump us with other private equity, like leveraged buyouts and hedge funds. We are totally unlike that. We’re threatened by legislation right now that will treat carried interest as ordinary income rather than capital gains, which I would think would destroy the aligned incentives of the venture business where LP GP and entrepreneur have one interest, which is capital gain, and I can go into great detail on that. So I wanted to get that message across. I also wanted that message to go to politicians, venture capitalists are more akin to entrepreneurs than they are to hedge funds that I think the average holding period can be anywhere from four to 16 seconds unprogrammed writing, and they’re more akin. to entrepreneurs than they are to leveraged buyout funds, or the average time horizon is three to five years, and leveraged buyouts funds are restructuring of existing companies or just using financial leverage to produce results. Or as we take companies and change the way the world is, let me give an example about that. That opens up with the story of you, you net? Well, you you net is a company that started and we bring in a CEO. And that company eventually has 70% of the traffic over the internet, that huge net was the internet. And I look today at what’s going on in the Ukraine. That is the first Boer War, all of us are sitting watching it. And people in front of us are practically dying on the screen. That is the internet. Putin, his biggest enemy is the internet, and the ability of the Internet to create a communication system within dictatorships that make it very hard for dictators to get away with fooling all the people all the time. So that company, to me is the definition of fundamental change, which is what we should try to do in the venture capital industry.

Is it fair to say that some of the changes in Washington and proposed changes to carried interest are the biggest threat to the industry?

I believe that because I believe the road to hell is paved with the bad incentive systems. And the thing that is good about the venture capital industry is our incentive systems are aligned. If you went, let’s say, to an all fee based system, that would totally change the way venture capital firms behave. I hope this book will show that venture capitalists are really involved in the selection of management, the development of strategy, the bringing in of significant customers, all the things that you do in your companies to help them to succeed is what venture capitalist should do. And we’re not the entrepreneurs and we don’t want to take anything away from them. But what we do is much more like what they do, and therefore should get the same type of treatment. At some points in any A’s history. Our average holding period was eight plus years.

You know, Chuck, I’ve been in this industry, startup investing for nearly a decade now. And I’ve seen plenty of changes just in 10 years. How do you think the venture industry has changed? You know, all the way back since 1945? If you step back, think about the writings of the book, you know, what have been the most significant shifts in the industry, for better for worse?

Well, in 1945, most of the venture firms on the east coast were family operations, the Rockefellers, Joan pace, and a pace and interest, the Phipps family. And then on the West Coast, you had in the 60s in the 70s, a new type of partnership emerge, which were dedicated professional venture partnerships, like Davis and rock, Draper, Gaither and Anderson, that’s general Draper, build rapers, Father, Tim Draper’s grandfather, and his daughters who are venture capitalists, great grandfather, to put it in perspective. So that was those were the early days. And as you say, the incentive systems in the industry were being designed, and the public markets were just coming into existence. Remember, before that, you had the prudent man rule, which said, if you were a pension fund, and you put money with an investment fund, and one investment went bad, you could be tried because that one investment was improved and judgment. We had to get rid of that before you could start getting pension funds as investors. So we go throughout the 60s and 70s. By the time the late 80s, had come around, there were venture funds that had been in existence for 2030 years. And some investors had never lost money in any venture fund. So the idea that the prudent man rule would be violated was absolute baloney. Matter of fact, you had more stable results out of venture portfolios at that time, by far than you did out of public companies, if you looked at them over an eight or 10 year period. So then the mass of pension money starts flowing in, and you start to get the necessity of specializing. So I said when NEA started out, we were all generalist, I did a software deal, if you can believe that. And it made four times its money. Thank you. And so we all start focusing, and initially it’s just within the partnership and a small group, but then we start building in the 80s In the 90s, these teams, which consist of 1020 people, you know, and they’re really specialized the by the year 2005, the Med Team at naa consisted of 23 people, you had three very successful biotech entrepreneurs, each made about a half a billion dollars each, you had 12 or 14, MD, PhD, molecular scientist with 20 years work experience. And then you had investment people like myself thrown into that mix. We made a mistake, we got too many all stars you need. I’ve come to believe that you needed a team that isn’t 100% Olympic athletes, because managing Olympic athletes is like managing cats are hard to point in one direction. But whatever it is, we managed to get all through that. Now. In the meantime, you had the heyday of of small company, public underwriting under the four horsemen, the laws in the investment management, investment banking, business change, you couldn’t make money taking the small company public anymore. They sold all the investment banks, to large buyers, and they went into the money management business themselves. So they’ll Hambrecht had his own Tommy Weisel. These were all the four horsemen that have now investment management businesses. And then you get the advent of the unicorns and the billion dollar companies. And all of a sudden, the compensation metrics that you’ve used, go out the window, because how can you give someone who made $3 billion for you normal raise, you’ve got to do things special. So you have to rethink your business based on these large gigantic outcomes. And the whole structure, the investment banking, business changes, and the venture business continues to get more and more and more complicated. And then you have the move overseas to which started, actually, Bill Draper was one of the first to go to India and produce a very good track record in this late 70s or or mid 80s. I think. So that’s coming in as well. I’ve sort of jumbled things up. But I think you’d get a feeling for how the industry has evolved. Since
I do think that now is the best time to be a venture capitalist? Or do you have concerns about supply side of capital in pipe? Sort of, you know, out running true value?

Well, the first thing you have to know about venture capital is it’s a bipolar business. And it has its highs and its lows. And I don’t believe that’s going away. We’ve been on a high. And I kept I would have thought we would have encountered a low by now. But we seem to be still pretty much in that high area. But no, so I’m optimistic about it. But it’s a cyclical business. And there will be a time when everybody thinks that venture capital is not the place to be. And that’s when I’ve also correlated that when those downturns cover, that’s when the Intel’s and the apples get funded in their first round. Shock.

I’m gonna ask you a few quick questions on advice. The first one is, somebody is thinking about building their own firm and raising their own fund, what advice would you have for them?

Same advice I’d give to someone who’s getting married. The most important decision in life is the partners that you pick. Perfect.

Next question is advice on selection. So somebody who is an existing investor in the space, what advice would you have with regards to picking?

Management and field, fertility of the field? Those are the two things you focus on. But to do that, you really got to know the areas in which you’re investing in. Why do firms like any a managed to produce predictable results over time? Because if you identify it, this is not an NDA. But let’s say you invest in Google and Amazon as startups and anyone’s going to do an internet related startup, who are they going to come to? Well, at 1.9 my career, anybody who did a healthcare service investment in the United States would come to me first, and anyone who did a technology communications infrastructure deal would go to Dick because you develop a reputation over time in the people that you invest in become your PR department. So when you have the top person in an industry, saying you help make the company In my book, I give the testimonies of the entrepreneurs to the NCAA partners that have helped them and they did entrepreneurs describe at each stage of building our company, what contribution each partner made. And you can’t beat those reputations. You can’t beat that. And I think that’s what gives you the barriers to entry and ability to produce consistent results.

Well, especially when the new young founders reach out to some of the successes in the space, the other founders and those founders send them your way. It’s like the best referral you can get.

Basically, our deal flow 80% of it came from either people we’d financed before, or venture firms that we’d worked with. I got so I only work with five other venture firms in the country

For subsequent capital at later stages or?

Oh, no, when I was looking for partners to bring in as Co-investors, and I seen as many companies run by investor syndicates, as I have, I’ve screwed up management. Where are the investors start fighting among each other? C and D round, or you get someone in there who thinks they know how to run the company better than the CEO does and starts micromanaging. And so I’d want to make sure that the people that I worked with were the ones just like, I wanted to have partners that had the same values and goals, I wanted, the investors that I worked with, to have the same values and goals. So people like Tony Evnin at Venrock, or Jim Blair, at Domain, are the people I’ve worked with consistently. Also, Sage Givens at Acacia.

It is sort of a dirty secret of the industry, some boards function well, and many do not. And I’ve been on some of those, and he can be a train wreck. Chuck, in your estimation, you know, what determines success in business?

I think you have to be driven to do something, I think you have to be willing to dare disturb the universe, which is to look around the corner and see what other people don’t see. And devote your life to it. I think my partner did cram, like put it well. Venture capital is about having the courage to put trust in others, and the conviction to do the right thing, even when it’s hard. And so you got to go into the industry that you know, you got to develop a reputation in the industry that you know, and then you got to attract the right people to you, that come to you. Because they want to work with you.

Couldn’t have said it better. Chuck, if we can feature anyone on the show here, who do you think we should interview and what topic would you like to hear them speak about?

I do two people, I would do Mohamad Makhzoumi, who will have NEA, and he is going to be one of the next managing partners, I believe when Scott steps down, which I hope won’t happen for some period of time. But NEA, we always had plans for multi generational leadership. And having talked about the future of healthcare in this crazy environment in which we’re in. And then I always recommend Jim Swartz, who was the founder of Accel because he is someone who has a unique perspective on the venture industry. And his story of his career and how he got there is fascinating how he ended up with his partner, Arthur Patterson, many, many years, and the great company they’ve created in Accel, which of course, all these internet companies

Love it. Looking forward to getting Jim. Chuck, do you have any tools or learnings that are a secret weapon? Well, I have

Never say die, which in Latin is “Nil desperandum”. And then I have my 20 rules for venture capitalists. And I’ll tell you, some of them, you’re only one person away from a great company, never say die. I’ve never met an equity dollar I didn’t like something when you invest in a company have a resignation box. And what you do is you show your prospective entrepreneur, that if he doesn’t produce if the sales don’t go as forecast, and the losses double and triple and triple, there will be a point in time when there’s a resignation box. And you basically make it clear to him that if the company does not work, your job will be to try to save the business. I have rules about how equity should be distributed in the company. Can you give us the broad strokes on that 70% For the people that produce the bottom line, which are probably the top eight and 30% for the others and obviously As your CEO is the most important and gets the largest share, and then you back it off to seat marketing, but you try to identify the people that create the market and the product. And make sure that the P people there have major equity ownership interest. And then you make sure that people throughout the company have the chance to own that 30% of the equity. When the time you realize a person should be terminated, you’re probably too late. Follow your winners. Those are just a few. You read the book. They’re all there, but it’s an intelligence test. Can you find them?

Very good? Well, the man is Chuck Newhall book is Dare Disturb the Universe: A Memoir of Venture Capital. Chuck, this has been a true honor to do this interview. I appreciate your time and all your insights today.

Good luck in your own career and go out and change the way the universe is.

Thank you, sir. We’ll do

Transcribed by https://otter.ai