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Part I: Nuggets vs. Pioneers: Is Venture Capital Dying?

May 23, 2013

By John Bhakdi

Venture Capital is dead – that could be the headline of the extensive Kauffman report from May 2012. Venture Capital (VC) delivers sub-par returns compared to other alternatives, longer lock-ups, and higher risk. The VC index returned nearly exactly 0% from 2001 to 2011, and even players like Sequoia Capital – one of the leading VC firms – returned only 11% p.a. in their best fund over the last 10 years. Compare this to a top 10 hedge fund, and you will realize that VC is dramatically underperforming in risk, return, liquidity and volume. VC as an asset class flatlines in volume, remains marginal in most portfolios, and is considered by most institutional investors as a fun sport, not a grown up asset class.

But the story doesn’t end here. While Venture Capital fails, its investment targets don’t. Disruptive technology startups like Facebook, Google and Apple are transforming our world on a massive and growing scale. How can an industry responsible for enabling future NASDAQ and Dow Jones leaders with trillions of dollars in market cap perform so miserably as an asset class?

The answer can be found in a failing approach to venture investing. I call it “Seeking Nuggets” vs. “Breeding Pioneers”.

When VC started in the 1970ies, the game looked like this: a bunch of pioneering smart people developed a disruptive technology, often at an elite university (think: Stanford). The technology could disrupt a whole industry, or create a new market – but no bank would provide the capital to develop the technology into a business. And so, the first VC firms – among them Kleiner Perkins Caufield Byers and Sequoia Capital – would invest the money to bring the technology to market. The result: firms like Intel, Amgen, Genentech and Cisco changed the world, and created sensational wealth for their investors.

The underlying approach to this type of venture investing can be called “Seeking Nuggets”: A scientist or geek builds a new technology goldmine, carries the first gold nuggets to investors, who provides the capital to mine the rest. That's what basically every venture investor still tries to do to this day. But today, the former small circle of the first few Venture Capitalists (VCs) has turned into an industry of thousands who seek these nuggets. At the same time, the number of pioneers who unlock goldmines has struggled to keep up. The result: too many VCs chase too few nuggets, leading to overpriced deals, which drives down returns to the point of total efficiency: 0%.
But there is another side to this story.
While venture investors continued to seek nuggets, the world around them changed. Technology became ubiquitous, and entrepreneurs didn’t have to develop hard technologies any more in order to disrupt markets. All they need today is a laptop, vision, determination and a lean startup process.
This new environment has turned our world into one giant technology goldmine: the internet, connected to billions of human minds, factories, warehouses, businesses and industries through billions of devices. We don’t need to wait for someone to develop a new technology any more. We are surrounded by ubiquitous technological opportunity. And this means instead of seeking nuggets, we can equip startup pioneers with basic resources and knowledge, and let them dig out the nuggets we seek.

This new paradigm is visible in every recent tech success story. Apple, Google, Paypal, Facebook, Twitter, Instagram, Linked In, Zynga, Netflix, Dropbox, Airbnb and even SpaceX and Tesla: these companies are not build around a new technology nugget, but by pioneering minds that relentlessly re-combine existing technology to unlock new markets. Technology is not a bottleneck anymore – the people who leverage it are. The pioneers.

Instead of Seeking Startup Nuggets, We Can Fund Clusters of Pioneers To Create Them

But what exactly is a pioneer? It is someone who decides to tackle a problem, doesn't quit, and improves on the way. In theory, everyone can be a pioneer. In the new scenario of cheap and ubiquitous technology, being a successful entrepreneur is infinitely easier than 10 years ago; and to lean back and wait for nuggets to appear is outdated. This is why we need to switch our investment mindset from Seeking Nuggets to Breeding Pioneers - to stop looking for disruptive companies, and instead empower clusters of pioneers to build them.

But this new approach needs to be embedded into a new and well-designed investment logic in order to work. And this requires us to fundamentally re-imagine VC. Pioneer-breeding seed funds have to be infrastructure builders: they have to attract large numbers of talented, entrepreneurial minds into the start-up ecosystem; they have to provide them with systems of education and acceleration; and with lean, efficient funding.

The Biggest Economic Opportunity of Our Time

Early on, I was convinced of two facts: First, building this new seed stage infrastructure would boost the entire VC ecosystem by an order of magnitudes, and represent one of the biggest economic opportunities of our time. And second, doing so will require a radical extension of the venture capital model. In 2010, myself along with a small team of pioneers decided to start the development of the innovation infrastructure and exchange, or short: i2X. Our goal: to create a structured investment framework that provides capital markets with complete risk-return transparency of seed stage startup ecosystems, and allows the structured design of scalable seed stage startup portfolios.

After over two years of hard work, we have completed the i2X framework. It turns large clusters of seed stage startups into a new asset class that performs at 30%+ annual returns at a zero risk of loss. It allows capital markets to invest into a broad share of the best technology startups before anyone else can. It provides a massive boost of high-quality deal flow to conventional VC and PE firms. And most importantly it frees seed stage entrepreneurs to focus on innovation, not fundraising.

John Bhakdi is founder and CEO of i2X. He previously served as an executive in some of the largest Omnicom and WPP companies (S&F, JWT, BBDO, DDB) where he shaped corporate development, M&A and innovation activities as Strategy and Executive Director. During his career, John worked closely together with both entrepreneurs and C-level executives in companies such as MasterCard, Siemens, Sinopec, Ford Motor Group, Dow Jones, Microsoft, The Ritz Carlton, Mercedes Benz, Deutsche Bank and Credit Suisse. In 2008, he decided to become an entrepreneur himself and moved to Silicon Valley which later led to the founding of i2X. Email John at

i2X is a structured seed investment framework that allows institutional investors to capture large clusters of seed stage startups at a superior risk/return performance. The i2X framework has been developed with the input from partners at top 10 Venture Capital firms, The White House’s Startup America Partnership, some of the top 25 alternative asset management firms and a large network of technology entrepreneurs and accelerator teams.