A year of recovery, of cautious optimism. LinkedIn's May IPO marked the reopening of the venture-backed IPO channel. In October we lost Steve Jobs. In the same month, WeChat — launched by Tencent the previous January — passed its first hundred million users. We have begun deploying the dry powder we held during 2008 and 2009. This letter is about what the new vintage of companies is teaching us.
On the Capital We Are Now Putting to Work
We made fourteen new commitments this year, the highest count since 2007. The pace surprised us; we had not planned for it. The proximate cause was simply that the quality of opportunities crossed a threshold our framework had been waiting for, and we had to choose between pacing capital and pacing conviction. We chose conviction.
This is not a permanent acceleration. We expect 2012 to look more like our average year. But the 2010-2011 vintage will, we believe, be among our best, and the firm's structure should be set up to deploy when conditions justify deployment, not on a calendar. We have, in past letters, criticized peer firms whose deployment cadences appeared to be driven by fund-cycle pressure rather than market opportunity. We are now grateful that our own structure does not impose a corresponding pressure in the opposite direction; a year of higher-than-average commitments does not require apology to anyone.
The fourteen commitments span more sectors than our portfolio has historically covered in a single vintage. Approximately a third are in consumer mobile; a third in enterprise infrastructure; the remaining third spans biotechnology, financial technology, and a small number of categories we will be slower to characterize publicly. The diversification was not strategic. It was the consequence of the cycle reopening on multiple sectors simultaneously, all of which crossed our underwriting thresholds at approximately the same time.
On the Founders Who Have Never Seen a Bull Market
Several of the founders we are now backing began their careers in 2008. Their formative environment was the crisis. They build differently. They raise smaller rounds, defer hiring longer, and treat capital as a precious input rather than an abundant one. We expect their companies to underperform during peak liquidity environments and to outperform across full cycles.
The disposition of these founders is one we did not anticipate. We had assumed, at the start of the recovery, that founders shaped by the crisis would have absorbed risk-aversion that would limit their ambition. The opposite has been true. Risk-aversion, in their case, has produced operational discipline rather than reduced ambition; the founders are pursuing the same scale of outcomes that 2006 founders pursued, but with different execution patterns. The combination is, in our view, structurally more productive than either earlier cohort.
We are, as a consequence, weighting cohort effects more heavily in our underwriting than we did before the crisis. The year a founder first ran a company is, we now believe, more predictive of operating disposition than several variables we had previously prioritized. We have integrated this into our internal diligence templates.
On Steve Jobs, Read Briefly
We will not write at length about an operator we did not know personally. We will say only this: the cleanest measure of an operator's quality is the durability of the institutional culture they leave behind. Apple has been making decisions, since October, that suggest the cultural transmission is real. We are watching closely, and we are using it as a study object for our own portfolio's eventual succession problems.
The succession question is one we have begun thinking about more seriously this year, partly because Apple's transition has surfaced it, and partly because several of the founders we backed in 1997-1999 are now of an age where their own succession decisions are coming into view. We do not have a single framework for this. We have a heuristic — that companies whose cultures depend on the personal presence of the founder do not survive the founder's departure, and that companies whose cultures have been institutionalized do. The institutionalization process takes a decade or more and cannot be compressed. The founders who began thinking about it five years ago will have an easier time than the founders who begin thinking about it now.
On WeChat, Which Will Reshape Asian Mobile Within Three Years
WeChat's first hundred million users arrived in eleven months. We do not believe this is primarily a messaging product. We believe it is the early form of an operating layer — payments, identity, commerce, social — assembled inside a single application by a domestic Chinese platform. We expect the Western mobile stack to eventually move in the same direction, but more slowly, because no single Western company is positioned to build it.
This is the most consequential product we have not invested in this year. We are pricing the implication into how we evaluate every Asian portfolio company we hold. Specifically: any Asian consumer-mobile company that does not have a credible thesis for its relationship with the WeChat platform — whether complementary, distribution-dependent, or insulated from it — is a company we are unlikely to back at later stages.
We expect the platform's reach to expand into financial services, transportation, retail, and several adjacent categories within three years. The Asian companies that will compound through that period will be the ones that have correctly anticipated where the platform will and will not extend. We are spending material time on this question.
A Closing Note
The capital we deploy today is the inventory of decisions our successors will manage. Our job is to make sure those decisions deserve to be inherited. The 2010-2011 vintage will, we believe, deserve inheriting. We do not say this often.
The Partners
Winzheng Family Investment Fund · December 2011