The following are excerpts from Dare Disturb the Universe.
NEA’s differentiating quality lay in our willingness to invest in many more industries than the typical California partnership then focused on (semiconductors and computers). I wrote a ten-page document at T. Rowe Price, outlining my small company investing strategy that became NEA’s bible. We chose to focus on medical devices, molecular biology, healthcare services, material and chemical science, semiconductor applications, alternative energy and energy services, food and agriculture innovation, the communication industry, analytical instruments, computer services companies, specialty retailing, and defense electronics. Dick, Frank, and I were generalists with experience in all of these fields. From the very start, we were asset allocators, adjusting our asset allocation to the industries we considered most interesting. After completing our first fund, we were on to the next. Our starting salaries were $50,000 per year. Frank and Dick both took major cuts in compensation.
Forest Baskett, a general partner at NEA, spoke about NEA’s corporate culture during an interview in 2018 with the Computer History Museum’s Len Shustek2:
“NEA is a partnership culture. That sounds a little odd. Venture capital firms are partnerships in a technical sense. NEA has a partnership culture in more of a spiritual sense so that everyone has the opportunity to have a voice, and everyone is expected to participate and contribute, and everyone is listened to.
It is very collegial in that respect, and it is really nice to be a part of and to contribute, know that your ideas are being heard, are being listened to, and to feel like you occasionally made a difference in terms of whether the firm did something or not.”
NEA was transparent. When we started NEA, most venture capital firms only communicated with their investors via a Christmas card, whereas NEA sent out complete annual reports. When we started, every quarter, our investors received a report that showed how our companies do versus their budget. NEA focused on the entrepreneur’s success, in good times and bad because we built loyal relationships with entrepreneurs. As a result, we were proud to say that seventy percent of our deal flow came from people we had worked with before, including repeat entrepreneurs. I have included letters from entrepreneurs attesting to the contributions of NEA partners at the end of this book.
As Forest Baskett explained in that interview with Len Shustek for the Computer History Museum: “We do keep long-term track investment records. There’s a saying in the industry, ‘It’s a very slow way to get rich.’ Because the typical deal takes eight years or longer to achieve liquidity. It’s a long time before you get to the point where people can look at your record and say, ‘You’re a good investor,’ or, ‘You’re not a good investor.’ But that is one of the things that we try to be able to do. Getting to be a general partner is a very slow process because being a general partner is like having tenure at a university, it’s something that you don’t go into lightly. Generally, the people who get there do have very good track records.”
Many NEA general partners started as associates and worked their way up the ladder. In the early 1980s, I drafted “The NEA Career Path,” a memo for young employees joining the firm without significant work experience. I divided the career path into six levels: 1) research associate 2) senior research associate 3) investing principal 4) partner 5) general partner 6) management committee.
The management committee that runs the firm was a group of four or five senior partners with twenty years or more years of tenure at NEA who had excellent investment records. The research associate (who generally had two to three years of experience) was tasked with learning the NEA way and assisting GPs and the partners. There were eight goals that the associate must accomplish. The senior research associate (who had an additional two to three years) had three goals to achieve. The investing principal (with another roughly two years of experience) had four goals, one of which was to build an investment track record. A partner had to help raise money and improve his investment track record. A general partner had seven goals, including investor relations and taking an active role in fundraising. To become a general partner, one had to be a key driver of the firm’s investment results. There were twenty-one goals that the GP must accomplish, including reaching a dollar goal for dollars distributed. There were seven goals management committee member must accomplish, including building a national reputation. The career path memo was re-written or updated every four to six years. I have only shared a few details because the memo is considered proprietary information by the firm.
Depending on at what stage you start, and whether or not you are successful of course, it can take five to ten years to become a general partner at NEA. The path to GP was not the same length for the med team as the tech team. Promising technology team members were often promoted faster than med team members because their companies reached liquidity much faster. It wouldn’t be unheard of for a tech partner to make GP in five years with an early and massive success. For most, though, it took close to ten years to become a GP. Because of the requirements to invest in each new partnership, it took me ten years to reach cash flow breakeven. For some, it took longer, which was one reason we made loans from the partnership to junior partners, so they could invest in each partnership. Needless to say, the partners who joined NEA with successful entrepreneurial or investing careers already under their belts tended to have totally different career paths. Many of them had successful careers as entrepreneurial CEO’s, were qualified, and became GPs right away.
NEA had several core values that we repeated all the time. We aimed to achieve superior investment returns for our limited partners. We partnered with entrepreneurs to build transformational companies with exceptional growth potential. We grew an enduring institution with shared values, goals, and rewards. We ensured junior partners and associates knew the firm’s strategy and could articulate it as well as any GP, and that they continually focused on long-term goals.
This meant significant responsibility for our junior partners, who were regularly expected to present at annual meetings and board meetings and had to be able to speak about the firm’s strategy, fund performance data, personnel and other matters. Conversely, many other VC firms hamstrung their junior partners and associates by discouraging them from having significant contact with limited partners. They feared that a junior partner might not represent the firm well or might spin out and take LPs with him or her. Usually, we met about twenty times a year for all firm or team dinners. The general partners introduced new people at these dinners and recognized the accomplishments of junior partners in their toasts. The newest partners were expected to give witty toasts that also demonstrate their in-depth knowledge of NEA.
We even made spouses of new partners give impromptu speeches. Frank started this practice of “singing for your supper” modeled after Baltimore debutante parties, where the debutante’s dance partner sang her praises in a humorous toast.
NEA fostered a team system, where teams voted on all major decisions. It was the opposite of a star system where a few people or even a single person made decisions and kept their rationale close to the vest. The challenge in a team system, was to get a group of talented people with big egos to work together.
Everyone at NEA was held accountable for overall fund performance. Associates and partners filled out annual reviews in which each partner or associate evaluated his or her own progress towards goals. The two GPs, who worked most closely with the associate or partner evaluated them and compared the evaluations to the self-evaluations. We also evaluated partners on long-term performance (looking at their previous five to ten years). Mistakes were tolerated. We knew that certain sectors would be hot or cold. We did not make the mistake of confusing wisdom with a bull market, and we did make big asset allocation changes with every fund to insure we were investing in the most rapidly growing industries of the future, not the past.
We initially called NEA’s board the “Investment Committee,” but eventually the name was changed to the “Board of Advisors”, I simply refer to it as “the Board.” The Investment Committee initially approved our investments. That lasted about eight months because it was unwieldy. The board approved our salaries and the budget for the firm. Our annual meetings lasted two days, though we met with the board four other times throughout the year.
The special contributions from specific board members, such as John Riddell, helped to guide NEA. In the beginning, while raising money for NEA I, we found ourselves desperate. Our only investors included the Deere Family, T. Rowe Price, and the Roberts Family. My partner Frank Bonsal knew Ezra Zilka, a director with influence at the Insurance Company of North America (INA), and while Ezra declined the investment personally, he did introduce us to John Riddell, one of INA’s senior investment officers. I was a cool winter day when we met in his downtown Philadelphia office, a brown mahogany room full of reproduction colonial furniture. He invited us to the Union Club for lunch, where I remember adding to the snapper soup a good dose of Manzanilla sherry. We began our conversation about the dream of NEA. If ever there was a man who would never invest in NEA, it was Riddell. Dressed in a dark grey suit, he was the epitome of the “Prudent Man Rule,” which was a law, at that time, stating that if a fiduciary makes a risky investment and loses money, he could be prosecuted. It has since been overturned.
We headed back to Riddell’s office, where the sunlight beamed through the blinds. John’s desk sat in front of the windows, and we had to squint to look at him. He said, “I like you guys. I like what you want to do. This is a very unusual investment for INA, but if you check out, INA will invest $3.5 million.” Charles (Chief’s) Burtons, John’s associate, did the due diligence. He went on to found Philadelphia Ventures, and was a great ally to NEA until his premature death. (You never know when you start a new relationship how it will turn out long term. Make an effort to insure all relationships work out well.) I was floored that we had another big, prestigious investor. After almost a year of fearing we wouldn’t be able to raise our first fund, I now knew for sure that we could do it. A year of fears and doubts flew right out of John’s bright window. John Riddell became the Chairman of NEA’s Investment Committee.
In early 1978, we visited the merchant bank Kleinwort Benson in England hosted by two partners, Harry Conroy and Bobby Nicole, who was an urbane English gentleman. He invited us to a luncheon in the elegant drawing room adjacent to Kleinwort Benson’s dining room. It was equal to a grand country house, filled with art, and eighteenth-century furniture and silver. Drinks were served in the early afternoon, and while most of the Kleinwort partners had gin and tonics, Frank and I favored the dry, manzanilla sherry. The servers and chefs were beautiful young women who had studied at the Cordon Bleu School in Paris, and they looked at us with warm, languorous stares. I will never forget that lunch. To start, we had a flavorful fish soup with a great French white burgundy, Puligny Montrachet. The fish course was sole menuière, followed by English roast beef, cooked and carved to perfection by a stunning French chef. It was accompanied by claret, a 1961 Château Lynch-Bages. (I was taking notes!) The questions flew fast and furious because our hosts knew their audience.
In vino veritas, they say.
We answered questions about everything, our childhoods, our wives, what activities we liked, crooks we had known, how well we knew British history. They asked about our best investments, our outlook for venture capital, because apparently, they felt that many had abandoned it, and then they asked us if we really thought there was a place for women in business. (We did.) We were baited to make fools of ourselves. The cheese and fruit followed with a great port, a 1963 Quinta de Noval. Next was a Grand Marnier soufflé with an acceptable sauterne, a 1967 Château Suiderant. Feeling as comfortable as we did in our own homes, we adjourned from lunch to the drawing room for brandy and cigars.
Later Merck approached, as to see if we would start a separate life science fund with Merck as the only investor. It was clear that Merck, as a corporation, might want to make an investment for strategic scientific purposes rather than for pure, economic gain. Who would make the final call on such a healthcare investment, NEA, or the dedicated life science fund? The potential number of conflicts we could envision multiplied to the point that we knew we had to decline the opportunity, but through these discussions about a Merck fund, Bobby defined a cornerstone principle of our partnership: avoid conflicts of interest.
In 1987, Tom Judge, who managed AT&T’s pension fund became an NEA Investment Committee member. He joined a general partner dinner and gave us a lesson in tough love. For years, NEA had followed a strategy of setting up affiliated funds around the country. Our hypothesis was that to work closely with a company, we (or an NEA-aligned surrogate) needed to live close to it. As such, we saw affiliated funds a way of not missing on opportunities in more remote locations where we didn’t have a presence because our offices were in California and Baltimore. We also established affiliated funds based not on region, but on promising specialized industries, like defense electronics, in order to increase our deal flow. To our horror, Tom began an NEA board meeting by saying that NEA had too many partners, too many investments in too many industries, too many partnerships, too many limited partners, and too many distractions. It was a difficult, heated discussion because NEA had invested six years of effort in establishing that network. Eventually, though, we admitted Tom was right. The affiliated funds received significantly more in distributions from their interest in NEA than NEA received from its interest in them. The program was not a financial success and was a major distraction when we helped the affiliates raise money.
We took the advice and set about winding down the affiliate program, which took a decade to accomplish, and we honed our focus investing in the two sectors where we had achieved the best results, healthcare and technology. We abandoned specialty retailing and financial services to name just a few areas where had any success. Two of the affiliated funds continued as independent entities, and we closed our books on the last affiliated partnership in 2005. Tom, by raising the issue was invaluable and refining our mission helped generate the success of NEA Fund V, along with the future fund partnerships.
Later in the partnership’s life, Tom would make another great contribution. We were trying to figure out the proper size for NEA 10. I was concerned that by not following on by heavily investing in the later rounds of our best companies we were squandering opportunities. Tom said that if we did this, we would expand from early stage investing into what he called “venture growth equity” and we would need much larger fund sizes. We jointly decided that NEA 10 should be a two-billion-dollar fund. Tom and other investors related to AT&T (Legend and the Baby Bells), invested hundreds of millions of dollars into our new fund.