[This will only be of interest to a small number of people, but if you’re working in VR or VC, you’re probably following this story.]
I just read this Backchannel piece (which is nicely done) on what’s happening at Rothenberg Ventures and have some thoughts and questions, in no particular order:
1.Why did Mike Rothenberg want to be a venture capitalist in the first place? Reading the story, it seems that he is/was personally interested in networking with powerful people and celebrities, and hosting big splashy events, and while it’s true that you might do that sort of thing in the course of raising a fund, it’s not exactly your primary job as an investor. (Rothenberg says something about aiming to host 100 events a year. Can you think of any VC who would consider events hosted a meaningful KPI? What if the parties and the celebrities and the moneyed bigshots weren’t part of it? Would he enjoy spending his time thinking about capital allocation? How to grow the businesses in his portfolio? Or is that only interesting inasmuch as it might be the means to more parties and bigshots?)
2. It seems possible that Rothenberg did realize that he didn’t want to be a VC at some point, and he jumped into VR because it was different and exciting to him. (I get that. VR is exciting to me, and my company is working on a VR product, which is why this story is of interest to me — though in case this needs to be disclosed, I’ve never pitched Rothenberg Ventures myself and don’t know any of the principals.) But if you want to be in VR, and specifically, you want to run a VR company, why not just step down as a GP of the fund and go do that? It seems like a more reasonable choice than trying to do both, and if I were an LP, I personally wouldn’t want my fund manager to be operationally running a startup at the same time.
3. If you’re not going to do that, because you don’t want to or think you’re obligated to keep managing the fund yourself, how do you get around the fact that you’ve created an inherent conflict of interest? Your company now potential competes with other companies in your portfolio, and your decision to allocate a significant portion of the fund’s capital to your own company (at a round size that you haven’t done for an individual company to date) probably violates your fiduciary responsibilities to LPs to make allocations that are best for the portfolio. And I’m not sure if that constitutes self-dealing according to the terms of their agreements, but it sort of looks like it.
4. Why was it so important to Rothenberg that the firm spend so much of its resources (both in terms of money spent and his time) on raw marketing? I guess private fund advertising is the norm now, but Rothenberg Ventures seems to have gone so far overboard with it that it’s no wonder their events were parodied on Silicon Valley. (The description in the Backchannel piece almost makes it seem like SV didn’t go far enough.) To be fair, this one may be a cultural problem with the Valley in general. The appearance of success is often enough to get companies additional funding and by that metric, the most superficial of grand gestures can have a big payoff. Buzz often trumps substance. (This has always been the case, and I know that, but I still loathe it.)
5. There’s certainly a business to be had in producing 360 videos for celebrities and musicians. (For some insight into what that looks like, see here.) But it’s an agency/studio business, not a technology business. Would an early stage tech VC normally put 10% of its fund into a 360 video studio? A 360 video software product, maybe. But a creative studio that doesn’t scale and there’s no proprietary tech? I doubt it.
6. I think there’s a specific Silicon Valley type who has no problem raising money (and then sometimes getting away with mismanaging it for a while) because they exude an enthusiastic charisma and seem to be everywhere at once, spouting — or more likely, regurgitating — big ideas, and it’s seductive to people. This person is usually young, usually white, usually male, dresses a certain way (brand conscious, but casual), has the right pedigree (Stanford, Harvard), the right Rolodex (successful entrepreneurs who also went to Stanford, Harvard), and can trill the right rhetorical symphony on command (edgy, futuristic, and vague, but with safe-feeling credentials — i.e, “we’re going to be especially discerning in X bleeding edge space, but like Sequoia”.) And potential investors actually consider these things — maybe even subconsciously — indicators of mitigated risk. Or worse, de facto promise. As if they mean anything by themselves.
I think Mike Rothenberg probably hit all of those notes, and you can’t blame him for using what he has. But there probably wasn’t much evidence anywhere that he could manage a fund. And there, his investors probably bear some responsibility, too. If you write a big check to a guy you think has promise knowing he has no track record, you can’t really complain when it doesn’t work out. Early stage venture capital is the riskiest asset class available to an investor anyway, and if you’re gut-feeling your way into it based on little more than a personality assessment and someone’s social network, that might not be sufficient due diligence.
That said, I would imagine that given the sheer number of VR investments RV made, the fund might shake out okay because the sector is emergent and appears to be doing well. Rising tides, etc.
That said, even if Rothenberg is a bad fund manager, there’s a difference between being a bad fund manager because you have no talent for it, and being a bad fund manager because you are actively mismanaging the fund by not fulfilling basic fiduciary duties to investors. It still seems unclear which scenario was the case here. At least a few years ago he paid pretty good lip service to the notion that he’d never do the latter. In an interview with TechCrunch in 2013, he said, “I feel a very strong fiduciary duty to my LPs even though they know they’re taking a lot of risks.” Where did duty stop and start in Rothenberg’s mind?
7. I’m not sure if this has any implications for the VR industry at large, but it gives me some pause that one of the big motivations for River was Rothenberg’s desire to rub shoulders with powerful people in Hollywood, and maybe celebrities in particular. The entertainment industry is very important to VR and there are studios doing interesting, innovative VR content (Rothenberg investment WEVR among them, which is very impressive). But you have to wonder how far River will get if the founder’s primary interest is being in the same room with a specific type of person (famous, powerful, but mostly famous) rather than creating great content. Starfucking for its own sake is not a scaleable business with a discernible product, and I’d imagine it mostly just enhances the lifestyle of the founder. How interested is Rothenberg in the actual product?
8. If Rothenberg does want to throw epic parties and rub shoulders with celebrities, why didn’t he just cut to the chase and go straight to Hollywood, working in marketing for a big entertainment co or doing fundraising for movie studios, where he could have done all of those things and it’s exactly what he would have been expected to do? There are even jobs in the tech industry where that’s exactly what he’d be expected to do. Why choose to be a VC? Is this just Sean Parker Syndrome? (Which, let’s face it, pretty much only works for Sean Parker.)
9. I actually don’t think it’s a terrible idea for millennials to run VC firms. But I also think most VCs have to go through a few economic cycles to really know what they’re doing, and if you haven’t been through those things, you need some other sort of edge: experience as an entrepreneur, technical expertise, something. A network is a good and necessary thing to have, but Rothenberg’s pitch seems to have been entirely network-based. As in, I have a great network of entrepreneurs who are just as inexperienced as I am, and you as an LP, wouldn’t know who they are — because they’re inexperienced. Which, at best, is a sort of tautology. And on that basis that identifying the inexperienced and therefore underexposed, is an edge of sorts (assuming it is), you could probably hand every entrepreneurial Stanford CS grad a check for $100K for 10% of their first venture on their way to pick up their diploma and end up with a fund that performs comparably.
10. How much of a pass does Rothenberg get because he’s young(ish)? I’m conflicted on this one. On the one hand, I wouldn’t expect him to perform like someone with a couple more decades of experience, and I would expect some mistakes. But I also think if you’ve got 50 million under management, and your LPs are treating you like an expert and an adult by funding you, maybe you should be held to the same standards.
11. How much of a pass does he get because he’s in the Valley and seems to self-ID more as a technologist than an investor? Mistake-making is part of learning, and highly valued in entrepreneurial culture. Companies go belly up all the time, for a variety of different reasons. But I think it’s less tolerated in finance, and there are certain traits that you might want in an entrepreneur that you wouldn’t want in a money manager, even in what is again, the riskiest asset class available to an investor.
Which is not to say investors shouldn’t make mistakes. One big win can redeem an entire portfolio of mistakes sometimes. But a big fund failure is and should be a rare occurrence.
12. Maybe this is just a big high-profile outlier scenario. It could be. But I kind of doubt it because some of the things that seem to have led to it are not outliers: misaligned incentives, valuing culture fit and network over expertise, valuing inexperience and/or youth for its own sake, tech titans taking the rock star metaphor a little literally and being enamored with celebrity, and so on. These things don’t apply to everybody, but they’re not exactly rarities either.
If there’s a high note here, it’s that there are some good companies in that portfolio and they benefit from investments already made. And if Rothenberg manages to fix all of these problems, sort out his conflicts, pay back whoever needs to be paid back, the fund itself might be ok.
But he should probably think about what he really wants to do, and it seems like that probably doesn’t involve allocating other people’s money for maximum return or working head-down on product. For what it’s worth, I hear the weather is nice in L.A.