Del Johnson is going to change the venture capital industry forever.
Del Johnson is an absolute beast.
A fountain of energy the likes of which I have rarely seen in my decade and a half of working in the media and technology space.
Extremely competitive, clearheaded and confident in his articulation of his vision, Del is incredibly disciplined ordering his thoughts when speaking, and has an unnerving ability to hammer home his points with a laser precision that makes it incredibly difficult for his opponents to effectively sustain any counter-attack.
Del Johnson may very well be the “most contrarian thinker in venture capital” as he was once labelled — a label that he has proudly added to his Twitter bio. His Twitter account is a war zone of fierce discourse and debate. It has been the main platform from which he shares his disruptive ideas about the reforms and restructuring needed to create a more efficient, equitable venture capital industry.
He has consequently locked horns with some preeminent names in Silicon Valley.
Del is publicly challenging the core premises around which the VC industry has organized itself over the last 50 years — and is calling for fundamental, structural changes.
The criticisms of the venture capital industry are by now well documented and oft-discussed, almost memes unto themselves.
It’s insularity. It’s whiteness. It’s elitism. It’s cronyism. It’s insider-ism. It’s systemic racism and prejudice.
The still rampant, pervasive sexism.
The industry’s comically obstinate resistance to any substantive change over the years.
And, as Johnson’s persistent, withering criticisms have exposed over the torrid last couple years of his advocacy — venture capital’s extreme sensitivity to any criticisms of its core business models and value propositions.
The “VC industry” is a massively powerful and influential sector, a male-dominated capital allocation machine that as of 2021 still employs less than 90,000 professionals across its sphere.
Almost $200 billion dollars in funding was allocated to startup ventures in 2020 alone, with the industry projected to grow almost 20% annually through 2026.
Since its humble beginnings in Northern California in the 1960s, venture capital has become one of the most coveted, lucrative industries that a business professional can dream of working within.
Having pitched to VCs several times over my business career, I often found myself fantasizing about what it would be like to be sitting on the other side of the table, evaluating the various pitches of the hopeful founders in front of me, ultimately deciding who was worthy of funding — and often — who to instead thank for their time, and take a flyer on until a later date.
Venture capital investment is a subset of the private equity industry. On the surface, the model appears straightforward: venture firms raise money from LPs (limited partners) and then allocate that capital to startups founders eager to expand and scale their fledgling businesses.
Venture firms receive ownership stakes in these startups in return for capitalization, with firm representatives typically becoming installed onto the board of directors and into the core decision-making apparatus of the funded company.
Venture firms often provide startups with managerial and technical expertise, access to network resources and any support that can result in the capitalized startup achieving product-market fit, growth, scale and ultimately — acquisition or public IPO.
The industry has enjoyed meteoric growth over the last two decades, lionized on popular television shows such as The Apprentice, Dragon’s Den, Shark’s Tank and even brilliant satires such as HBO’s Silicon Valley. Dominated by influential firms such as Andreessen Horowitz, Accel, Sequoia, First Round and Benchmark, the business provides above-average returns for investors — and sometimes serious bragging rights when funded companies in the portfolio begin to enjoy breakaway success.
Technology titans that feature prominently in our everyday lives today, such as Airbnb, Facebook, Uber, Google, Tesla and Apple — are all beneficiaries of venture capitalization.
But as the industry has grown in power and prominence, so have the cries for reform, inclusion and meaningful attention to diversity. Female and minority founders are still woefully under-represented, with most of the annual capitalization invariably going to a small cadre of young, white male founders that are graduates of exclusive ivy-league schools such as Stanford, Harvard, Columbia and Wharton.
A number of firms promoting mandates of diversity and inclusion have come to the forefront over the last decade, led by highly touted stars such as Backstage Capital, Harlem Capital, BLCKVC and Latinx VC, as well as emerging standouts like Overlooked Ventures and RareBreed Ventures. Though the awareness efforts and public advocacy of these firms have to be lauded for spurring the conversation — underlying success measurement metrics have remained frustratingly paltry in relation to the rest of the industry.
Black and minority founders received merely 2 percent of 2020’s 200 billion extravaganza; female founders have not fared much better either, despite female venture capital professionals now accounting for 15% of the industry’s total, up from approximately 5% in 2015.
Enter Del Johnson.
In 2019, having delved into the industry for a couple years and beginning to form the conclusion that serious changes were needed, Johnson published an article on Medium and launched it with a Twitter thread. That article formed the basis of his main thesis of venture industry critique — a thesis he has been defending furiously ever since.
Ban Warm Introductions! is a tightly written battle cry that calls for an end to the friendship-based, insider relationship model upon which the vast majority of venture deals are premised. Referring to warm introductions as “exclusionary” and “value-destroying”, it becomes easy to see how eliminating the heavy reliance on this common industry practise could become a catalyst for solving the myriad of inequities and inefficiency problems and inequities within the industry.
The problem becomes obvious: of course it is near impossible for a minority or female founder to get venture funding if almost all of the funders are older white men working within an opaque system and only taking emails from friends, family and colleagues who are recommending meetings with younger white men hailing from mostly 5–7 ivy league schools.
Where Johnson has struck a particular nerve is the financial truth of his thesis: cronyism and exclusion can lead to lower long-term portfolio profits. Many studies in the last decade have shown that diverse teams foster environments of heightened creativity and problem-solving — favourable attributes in an industry that professes to be primarily focused on picking “winners” and seeing profitable returns on investment.
If firms are not adopting analytical, data-driven models for funding candidate selection — and are still openly telling people not to bother cold emailing or cold calling because they will only take meetings via warm introductions — it is possible that billions of potential dollars are being left on the table. Countless founders and teams existing outside of the VC industry’s exclusive networks have a less than zero chance of getting into boardrooms to pitch for funding.
Johnson further argues that the underlying mechanics of how the venture capital model has worked for the last fifty years are broken — and ultimately serve to erode the best efforts of even well-intentioned diversity-focused VCs. The warm introduction is still the number one tool employed when it comes to deal flow, cozy relationships are still the main currency, and true merit-based capital allocation predicated on clear data and analytics remains elusive.
A confluence of several historical factors have come together over the last 24 months creating a perfect storm that can lead to mass uptake of Johnson’s thesis.
Diversity, Equity and Inclusion (DEI) has come into vogue across the business world in the wake of the worldwide Black Lives Matter protests in the summer of 2020. Brands and corporations have made measurable progress when it comes to installing public initiatives and media messaging that espouse support for minority groups and BIPOC communities.
Growth across markets from technology through to media, healthcare and direct-to-consumer products have been significantly impacted by the global spread of the COVID-19 pandemic. Lockdowns and other mobility restricting measures imposed by world governments have led to a rise in venture deals being conducted virtually over video-conferencing platforms such as Zoom and Google Meet. The proliferation of virtual meetings has been palpable; a significant number of deals are now conducted over distance, lessening the traditional importance of physically journeying to firm offices in Silicon Valley and other tech hubs. The usual courting process involving in-person wining-and-dining, hob-nobbing and glad-handing has begun to be replaced by pragmatic, unemotional data-driven meetings, funding potential analyses and candidate selection.
Venture firms increasingly are turning to content publishing, podcasting and video marketing in efforts to raise their social profiles, leading to increased pressure to at least publicly appear to be committed to diversity and inclusion. Using algorithms and metrics-analyzing software to identify startups with high growth potential have become increasing popular (Toronto-based ClearCo — formerly Clearbanc — is a firm that comes to mind employing this strategy).
Further, the rise in popularity of cryptocurrencies such as Bitcoin and Ethereum in 2021 has spurred the dawn of what appears to be an evolutionary phase for digital communications, commerce and creative entrepreneurship. NFTs (non-fungible-tokens) are a brand new asset class that can be applied to digital art, videos and audio files — as well as real-world assets, communities and events —allowing for micro-funding and crowd-funding of ventures and projects at a mass scale previously impossible.
Public certificates proving NFT ownership and authenticity are logged transparently onto digital ledgers stored primarily on the Ethereum blockchain, which will inevitably lower barriers of entry and lead to new definitions of what we today consider venture capital. After all, “venture capital” in its simplest form can refer to any amount of capital that is allocated by an investor into a project — be that $100, $1000 or millions of dollars.
The data-driven, analytics-first venture investment thesis that Del has been promoting for years is no longer a fantastical premise. It is the future upon which the venture industry will flourish, with the clear potential to unlock billions of dollars of new capital from a growing crop of diverse new investors.
2022 is primed to be a moment of reckoning for venture capital. Jack Dorsey, the billionaire founder and former CEO of Twitter has been increasingly vocal in the last several weeks since his very public resignation from the Web2 giant’s executive, citing venture capitalists as “the problem” and warning starry-eyed entrants into Web3 that if they do not recognize the historically all-encompassing nature of venture capital encroachment into the space — many people hopeful for cryptocurrency investment and NFT tokenization to usher in a new democratic, free and open internet age will end up disappointed and demoralized.
What is notable about this development is that influential tech luminaries like Dorsey and Tesla’s Elon Musk, previous recipients of numerous rounds of venture capital funding during the ascent of Web2, are now openly criticizing the capital machine that propped them up — and warning others of the pernicious nature of the industry.
Del Johnson’s crusade has now been joined by some lofty names. Though all parties harbour clearly differing agendas and desired outcomes — the showdown is only just beginning.
How will the venture industry respond?
Riveted by the real world business case study playing out in front of our eyes, as the new year dawns we all await with bated breath for the next chapter.
