The Future Of Venture Capital: Trinity Ventures Partner Gus Tai (Part 3)

SM: You are a $300 million fund, but is your structure a standard 2 + 20?

GT: We don’t discuss the actual structure of our fund, but it is identical to our historical structure. When we started, [we were] circulating the idea that we would raise Trinity 10 with an identical focus to our other funds. The focus is on very early stage investing, an area in which we feel we have experience helping entrepreneurial teams of one to four people start a company and get it off the ground. Those are companies like Blue Nile and Photobucket.

SM: I have looked at the optimal fund size question quite a bit. It seems to me that $200 million-$300 million is the right fund size to do venture capital. If it is too small then participation becomes a challenge. You need enough partners to do the high-touch customer relationship with entrepreneurs. If the fund is too large then you cannot do high touch because the numbers do not compute. You have too much money to put to work. Since you are staying in the $300 million band, is it a fair statement to say that you have some of the same observations?

GT: I strongly believe that. One of our competitive advantages is the dollars in the fund per partner. We have seven general partners in a $300 million fund. That is $42 million per partner, a ration that is lower than most other mainstream venture firms we are aware of. The fund size matters, but also dollars per partner matters. If you have $100 million or $200 million per partner, it creates a mentality of being a drive-by director and a need to find a lot of companies to fund.

That model may work, and work well, in a bull marketplace where there is fast growth and everybody wins. When you are talking about turbulent times, which most companies in almost all circumstances will face, having the capacity to work with fewer companies allows you the chance to spend more time with them, which is a point of differentiation. Our LPs recognize that and applaud that we have maintained the same strategy since the founding of Trinity.

SM: On the contrary, in a lot of the industry there has been a rush to raise very large funds. Foundation is a very large fund, and even Sequoia has become a very large fund.

GT: I think Sequoia’s early stage fund is a $450 million fund. They have ancillary funds. My sense is that firms who have been in the business of doing early stage investing for decades have been able to contain the growth of the size of their funds. A number of them have chosen to go into the management of other asset classes. They might have the skill to do that and they might not.

SM: Venrock talks about doing venture investment in public equity. That model is becoming prevalent. I see a lot of mix and match in asset classes going on. My concern is that venture takes focus. It is hard to find trends, and companies are fragile and vulnerable. So much goes wrong that I am not comfortable with the mixing of asset classes. Are you?

GT: I believe you must have focus for whatever asset class you are doing. Could there be a venture firm that specializes in late stage? Yes. I don’t believe a firm can easily do a wide range of asset classes with a lot of money under management. Our model is to have a selective eight to ten investments per year for seven general partners. That ratio of investing is lower than for the rest of the industry, and we do spend a lot of time making sure we understand.

SM: That is conservative.

GT: We make sure we understand the management team we are funding and the marketplace they are in. We feel we have more differentiated value for early stage companies because we have seen how to launch companies for such a long time. If we find a great team in a market, we understand well that we will look at it as an investment, but we are looking for venture-type returns for those investments. We are not looking for a 2x type of thing.

This segment is part 3 in the series : The Future Of Venture Capital: Trinity Ventures Partner Gus Tai
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