There’s a certain irony about venture capital. VCs demand that the companies we invest in can “scale” and yet, VC is about the most unscaleable business model invented. First, we have to meet a huge amount of companies to find the very few we invest in. And then one VC partner has to manage a whole portfolio of startups — typically, a partner might end up managing 7 or 8 companies by the end of the fund.
With judicious juggling and experience, this is manageable. But could it be more efficient? This was one area the Kindred partners were thinking deeply about when we came together in 2015, with the mission to create the kind of VC we would have liked to have raised capital from when we were running startups ourselves.
If you ask most founders about their journey, you’ll find a dirty little secret. The most helpful, valuable and supportive people are almost always other contemporaneous founders — and only a very lucky few ever mention an investor. So, our challenge was to leverage this existing behaviour and create an environment that nurtured, accelerated and enhanced it. If we succeeded, it would mean that we could surround our portfolio CEOs with helpers, greatly enhancing our ability to support our founders.
We took inspiration from our own experience and the stock option programmes that most tech startups use to attract and retain talent. Founders give away some ownership in their company to employees, in the belief that a smaller slice of a bigger pie is worth more — much more — with a team of aligned and highly motivated colleagues.
And because it’s fair and equitable to share success with the people who helped make it happen.
How could Kindred take this principle and apply it to Venture Capital?
The main way that VC firms earn money from their fund is by investing in great companies which provide a meaningful return to the fund, and keeping a percentage of those profits generated — typically around 20% of the profit, once the original investment is returned. This percentage is known as “carry” or “carried interest”, a term that originally referred to the fees charged by ship owners for carrying cargo. If I own a ship and you want me to take a load of cloth to the US, I’ll charge 20% of the profits when the ship arrives and the goods are sold.
Our bold idea was to share our fund’s profits with the founders we invested in — or give them 20% of the carry the fund would earn. This means that every founder we invest in becomes a partner in Kindred, and therefore into a partner in each other’s companies, and we can turn a partnership of four into a formidable army of partners, all rewarded for supporting and nurturing each other.
The crucial question, after about a year, is — does this work? Of course, it’s too early to judge just how effective it will be on fund performance. But, there are some noticeable successes.
Firstly, the vast majority of our dealflow of new companies to invest in comes from our existing founders. Great founders attract other great founders and ours are keen to recruit the best into the Kindred collective.
A visible and active community is also growing around us. Our CEOs meet regularly, support each other, offer introductions to key hires, share war stories and knowledge.
However, their colleagues have noticed and have started their own groups. So any week taken at random will see clusters of Kindred engineering, talent, product, and sales people — all getting together to help each other succeed.
We’re proud to call this Equitable Venture. We hope it’ll catch on.