FRC’s Exchange Fund: VCs are from Mars, Traders are from Venus

Both the blogosphere and the Twittersphere have been abuzz with First Round Capital’s new exchange fund idea. Here are a few extract’s from Josh Kopelman’s post on the new program: 

This exchange fund
was created to allow First Round Capital entrepreneurs to contribute a
small piece of the stock they own in their company  — and share in the
upside of all the other companies.

When I was an entrepreneur, I remember
the feeling of having all my eggs in one basket — and it is our hope
that this fund will remove some of that stress.  Now our entrepreneurs
can get the same diversified portfolio that our limited partners get…

I totally get what what Josh and his partners are trying to do, and think it is both intellectually interesting and proposed with only the best of intentions. But as a practical matter, I just hate the idea.

It might be a cultural issue: I come from a very different world than Josh. He is a (very successful) serial entrepreneur and venture investor. I am a former Wall Street business head who managed groups of extremely aggressive, super high-performing originators and traders who has evolved into a venture investor. Words like “share in the upside” and “diversification” are not words with which I am familiar when it comes to the heads of my teams. In fact, they sound like communist rhetoric to the ears of someone use to the hurly-burly “Pay me for what I do” mantra of Wall Street.

Now, I’m not suggesting that “It’s all about me me me” is a good thing. In fact, I think it’s a bad thing - to a point. I think the root of my discomfort is with the fact that I want my entrepreneurs laser-focused and all-in, especially as they are working to establish traction and prove out the business model and value proposition. The last thing I want them to have (and I want them to want to have) is diversification. I want them to have the insane confidence my desk heads had, where they wanted to be paid for the value they created in their own businesses, and didn’t want to share in the upside of (or, more importantly, have their rewards dragged down by) the performance of other units. Further, I encouraged them to cooperate with other desks and business units when it made sense, but not because I compelled them to do so but because it made long-term economic sense for them to share with others. Forced sharing isn’t really sharing. It’s coercion. So regardless of whether one has direct economic exposure to the group one is sharing with, the motivations are clear: if it works to benefit my business, I will share. Otherwise, I won’t waste my time.

The way I’ve worked to relieve stress in my entrepreneurs is after they have gotten the business up and running, a scalable model is in place and the growth engine is humming along. At this point I have supported buying a small portion of the entrepreneur’s stock, either as part of a financing round or where insiders with deep pockets and demand purchase the stock directly from the entrepreneur. While the amounts involved will not dis-incentivize the entrepreneur from still driving as hard as they always have, they can often be life-changing by reducing stress and really enabling them to focus their energy on the business (even after it is successful). This is my preferred way of handling the “diversification” issue. Until business stability is achieved and rapid growth has taken place, I want the entrepreneur to feel stress - positive and necessary stress, in my opinion. 

Is Josh right or am I right? Reasonable people can disagree. But I am personally fascinated with the idea because it is so completely opposite of the behavior I would want to see in my entrepreneurs.