Jorge M. Torres

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To Make Money in Venture Capital, Invest In Illiquidity



In venture capital, it pays to be right. But it pays even more to be right and contrarian. 

As the FT reported (gated) last week, this year’s Graham & Dodd prize recognizes the discovery of a new way to identify stocks that are poised to outperform the market. Traditionally, there have been three widely-held beliefs about the most valuable stocks:

  • Cheap stocks outperform more expensive stocks;
  • Small stocks outperform larger stocks; and
  • Winning stocks tend to keep winning, and losers tend to keep losing.

Now, there’s a fourth factor:

  • Less liquid stocks outperform more liquid stocks.

This makes sense. Investors should earn a premium for holding an illiquid stock over a long period of time. According to the FT, for 3,500 public stocks, “the least liquid quartile, from 1972 to 2011, returned an average of 16.38 per cent, compared to 11.04 per cent for the most heavily traded stocks, and 14.46 per cent for the universe of stocks under control.”

Not bad. But, how does this translate to private stocks? The FT article has an interesting clue:

[L]iquidity tends to overlap with “newsworthiness” or “popularity.” Stocks at the centre of attention like Google or Facebook are highly unlikely to show up as low-turnover stocks for many years to come. Stocks that are neglected and ignored will be relatively illiquid.

In private markets, the stocks of unpopular or ignored companies tend to suffer from illiquidity. Founders whose companies or target markets are unpopular or overlooked have a harder time trading their stock for investment capital than founders building companies in the hottest sectors.

Yet, in venture capital, it’s these highly “illiquid” investments that make the most money. Some of today’s most valuable venture-backed startups, like DropBox, AirBnb, and Uber, were unpopular with investors when the companies were seeking their very first rounds of financing. Likewise, investing in the consumer internet in the wake of the bursting bubble was unpopular in the extreme. Just ask founders who were trying to raise money during that time. But, those were the very years when Facebook and Twitter raised their first outside rounds.

Early investors in these companies have earned huge liquidity premiums, largely for investing in technologies or in sectors that were unpopular and being right. It seems that a contrarian’s taste for illiquidity coupled with a long-term mindset is one of the sweetest recipes for success in venture capital. 

photo credit: Randy Son Of Robert

Investors In the Twitter IPO Are Buying the Business, Not Its Patents



I’ve been mildly amused by the news that some people think Twitter’s puny patent portfolio is cause for concern as the company makes plans to IPO later this year. The criticism focuses on Twitter’s permissive attitude towards pursuing infringers and its company culture, which doesn’t make its employees sign over all possible rights in the inventions they make while on the job.

That thinking misses the fact that the company’s enterprise value lies in the hundreds of millions of people who use Twitter and the ways that it is monetizing connections between users through Promoted Tweets and other revenue models to be implemented later. 

Twitter’s approach to patents is not a sign of a troubled business, but a consequence of the reality that patents simply don’t matter all that much to Twitter’s business.  This frees the company to use an invention assignment policy that mirrors hacker norms hostile to software patents and to the public policies that allow software patents to exist. As I explained when Twitter first announced that it would use the Innovator’s Patent Agreement, company policy gives its developers potentially lucrative veto rights over offensive assertions of the company’s patents that it might want to make in the future.

The first 18 months of operating history under the IPA have made it clear that the developer veto rights in the IPA will rarely, if ever, have meaningful financial value. One reason for this is that the language in the IPA that demarcates the line between offensive and defensive uses of Twitter’s patents is quite vague. It gives Twitter enough wiggle room to sue others on its patents over the objections of its developer-inventors if and when it needs to do so.

Another reason has to do with the nature of the patent litigations in which Twitter typically finds itself embroiled. When I searched Lex Machina for Twitter’s patent litigation history, I discovered that each of its 18 patent infringement lawsuits has involved a defensive situation, i.e., one where the company is on the receiving end of an infringement accusation. It doesn’t look like Twitter has ever used its patents offensively, a use that would arguably give rise to developer veto rights. And the parties that accuse Twitter of patent infringement in these cases do not compete head-to-head with the company. It’s not as if the company is out there chasing down infringers, even though that is something another company might do if it wanted to. A quick scan of the plaintiffs also suggests that many of them may be NPEs, which are immune from countersuits by Twitter on any of its own patents. 

As a large network, things like the IPA and it’s posture towards pursuing infringers don’t really impact the value of Twitter’s business. I think most investors understand this, which is why they’re rightly focused on testing the credibility of management’s plans for reaching profitability and not on how Twitter is going to beef up its patent portfolio. If they buy shares when Twitter starts trading publicly, they’ll be buying the company’s business, not it’s patents.

Disclaimer: The post above is not, and should not be considered, legal advice, investment advice, or advice of any kind. The opinions expressed above are solely those of the author, and the reader should not attribute them to anyone else.

Applying to the Kauffman Fellows Program


I graduated from the Kauffman Fellows Program back in July, and I’m still coming off of the high of my final class sessions, my classmates’ field study presentations, and time spent bonding with the most accomplished group of professional peers I’ve ever been fortunate enough to call my good friends.

All of this has inspired me to write a series of posts on the Fellows Program. In this post, I’m going to focus on the basics of the application process and the background on the program that will (hopefully) help you write a better application. In the future, I’ll cover other aspects of the process, like the interview and how to approach affiliation. 

This is quite a long post. If you’d like to get some of the same information visually, take a look at this recruiting deck below, which was made by the Center for Venture Education (the non-profit that organizes and administers the program). 

One note of caution: What follows is one person’s perspective. It doesn’t represent the views of the Center for Venture Education, its staff, its board, or anyone else in the Fellows community. Any errors or omissions are my own. 

Some History


Around 20 years ago, the Ewing Marion Kauffman Foundation decided to start a training program for venture capital investors modeled on the many successful initiatives it was running for startup founders. The Foundation had several goals in mind, including: i) creating a pipeline for talented professionals into the venture industry; ii) formalizing the way venture capital firms recruit new talent; and iii) promoting gender, racial, and ethnic diversity in the industry. [1]

The overarching goal was (and still is) to make better venture capital investors – people who are passionately committed to supporting founders and to delivering outsize returns to investors.  In fact, one of the key insights Fellows learn by going through program is how those two concepts – outsize returns and a founder-first investor orientation – are actually part of the same recipe for success. Much of the program curriculum focuses on helping Fellows align these concepts in the various settings in which they find themselves. 

Two Paths

imageAround 2006, the Palo-Alto based Center for Venture Education (CVE) was created to house the Fellows Program. CVE is a non-profit and independent organization that operates the Fellows Program today. The CVE also runs a number of initiatives around community formation (Kauffman Fellows Society), online education (Kauffman Fellows Academy), media (Kauffman Fellows Press), and capital engagement (Kauffman Fellows Capital). 

For the Fellows Program, CVE actually runs two different application processes in parallel that converge on the day in July when a new class of Fellows meets in Palo Alto to begin its Fellowship.

The first process is known as the Finalist process, which is for candidates who are currently working outside venture capital or whose career doesn’t involve actively investing in startups in some way. If you’re graduating from an MBA or PhD program and job-hunting with aspirations to land in venture, the Finalist application is for you. If you’re in consulting, banking, law, or something else tangential to venture capital and new venture formation, and you want to transition into venture capital, then the Finalist process is likely the best route for you. [2]

There are three phases of the Finalist process: i) written application (essays, transcripts, letters of reference); ii) the interview; and iii) affiliation. Applicants are invited to interview on the strength of their written applications. If the interview goes well, the applicant is invited into the program provided that he or she can secure an appropriate affiliation with a venture capital firm or other organization that puts time, money, and advice into startups. (More on that below.) People who are given this conditional offer to join the Fellows Program are called Kauffman Finalists. They become Kauffman Fellows when they secure an affiliation with a venture capital firm or other appropriate organization and the CVE approves of the would-be Fellow’s plans.

In the past, the Kauffman Finalist designation has been valid for two years, so that if a Finalist does not find an affiliation by the time the new class starts, he or she can keep looking with the aim of affiliating in time to join the class that starts the following year. There is a least one Fellow in every class who became a Finalist in one year and who found an affiliation the following year. I don’t know if the CVE is still running the Finalist process this way, so you should contact the staff to find out the most accurate information.  

If you’re already working in venture or in one of the other non-venture capital roles represented in the Fellows community today, then the Affiliate process is for you. Compared to the Finalist process, the Affiliate process can be more straightforward. You submit a written application, and you interview. If your interview goes well and your employer and the CVE sign off, you’re in the Fellows Program. An important aspect of the Affiliate application process is persuading your employer to give you the time away from the office and (sometimes) the financial support required to enroll. [3]

It’s important to note that unlike academic fellowships, the Kauffman program is tuition-based. Tuition is currently $72,500 (total, over two years). When you consider tuition, completing the Fellows program is requires an investment akin to the ones you’ve already made in your undergraduate and graduate/professional degrees. Consider your investment wisely. 


imageThe Program has operated continuously since its founding, and, with my batch, has graduated 16 classes of Kauffman Fellows. In the beginning, the Program organized a sort of “match-day” in which applicants were invited to interview with brand name, mostly Sand Hill Road, venture capital firms. From the applicant’s perspective, the bulk of the work of becoming a Kauffman Fellows was front-loaded. Admissions used a highly stringent filter to determine which applicants would be invited to the match-day. As you might expect, those applicants who were invited had a very good chance of landing a job at a top venture capital firm. Merely being invited was a signal that the person was a high potential candidate for venture. It was like the NBA Draft, but even more selective. It was great for applicants who made it through the filter, and GPs loved it because it made recruiting fresh talent highly efficient. 

Today, the Program still uses a very selective, if not more selective, filter on the front end, but it no longer organizes a match day. This is due in part to the shrinking number of open positions available annually in the venture capital industry. But the main reason match day doesn’t make sense anymore is because the Program now draws from a pool of applicants who are coming from a much more diverse set of functional roles than principal investor at a brand name U.S. venture capital firm. Given the broad demand for admission into the program along sector, stage, size, and geography, it would be difficult to organize a match day that could provide the same efficiencies today. 

However, matching is still part of the Program’s DNA. If you’re applying through the Finalist program, or even if you’re an Affiliate candidate who has to persuade her boss or partner to green-light her participation in the program, getting someone else’s support is going to be a critical part of becoming a Kauffman Fellow for most candidates.

What happens once I’m in? 

The short answer is that you go through an intense training program in venture capital and startup creation that involves class work, independent study, mentorship, networking, and leadership development. The curriculum is delivered through seven modules that CVE organizes over the course of two years. The modules are held in Palo Alto in March, July, and October. 

It’s very hard to generalize the impact that these modules have on Fellows, mainly because what one gets out of them is a function of where a Fellow works and what she is trying to accomplish in her career. Also, much of the content is not open to people outside of the Fellows community, especially when it involves the comments and views that top VC practitioners choose to share with the community when they visit. If you’re eager to learn more about what actually happens during the sessions and how it can impact your career, and you should be if you’re applying, then you should definitely connect with Fellows in your ecosystem in order to learn more. 

Think locally, Invest Globally.


As I get to the end of this marathon post, I realize that I’ve completely buried the lede.

That’s because I’m only now talking about people; classmates, mentors, speakers, founders, and staff who you will meet along the way and who make the Fellows program the very unique educational experience that it is.

Check out this Twitter list of Fellows to get a sense of who’s in the program (at least on Twitter). It’s pretty amazing to see in real time how each one is actively investing in his community and building a startup ecosystem.

Each class that enters the Fellowship these days brings into the community people who are leaders in their fields around the planet. Whether they’re running economic ministries, angel groups, accelerator programs, or serving as investment professionals in brand-name venture capital firms, they are all highly accomplished and driven to become even better at what they do. It’s not uncommon for Fellows, many of whom have attended the top universities in their countries, sold companies, or who have already distinguished themselves as investors, to wonder how they met the high bar of admissions. 

You might think that such a group would be full of arrogant and competitive people. While Fellows can get pretty competitive (poker, anyone?) the CVE has an unusual knack for selecting candidates who optimize IQ as well as EQ. They’re smart, but coachable; self-aware, but humble; confident, yet vulnerable. People like that are unique and hard to describe with words. So, once again, if you have any interest in what actually happens at the modules, you should meet the CVE staff and get to know the members of the Fellows community who live and work where you live.


This post is a primer on the basics of applying to the Fellows program, and it’s intended as a jumping-off point for Q&A in the comments or elsewhere. I hope you’ve found the information useful as you put together your application, or at least, that you’ve had your interest piqued. In either case, I encourage you to learn more.


[1] I’m sure I’ve left out a lot of important objectives and history. If you can fill in the gaps, please let me know or speak up in the comments.

[2] I say “likely,” because, for some, it may make more sense to land in venture before considering the Kauffman Fellows Program. Depending on how much experience you have, what you want to do, and your life stage, the best route into venture may not be to apply to the Fellows program right away. It might make more sense to do the Fellows program after you’ve spent a couple of years in venture or in another field in which you work intimately with startups. It’s a personal decision, and there is no “right way” to navigate these issues. 

[3] I applied through the Finalist process, so I’m not that familiar with the intricacies of the Affiliate process. If you can add some color, please do so in the comments or message me and I’ll update this post. 

Photo Credits

Franklin B Thompson (Some History) (Two Paths)

Aidan Jones (Affiliation)

pwoodleywonderworks (Think Locally, Invest Globally.)

VC Perspectives: Steve Blank On When You Should Raise Outside Money

For many entrepreneurs “raising money” has replaced “building a sustainable business” as their goal.  That’s a big mistake. 

He’s not a VC, but Steve Blank may as well be a VC given the amount of time he spends helping others build their businesses and the brand name recognition he’s achieved in startup communities around the world. His latest post encapsulates the best advice for founders on when to raise outside money. 

Like a lot of Steve’s posts, this one is really about priorities. Building a business should be a founder’s first priority. Raising outside money should serve, but never replace, the #1 priority of building a sustainable business. 

Are you building an online consumer brand? Then you need to read Andy Dunn.


Are you building an online consumer brand? Then you need to read Andy Dunn.

Proprietary merchandise is when a company builds its own brand with e-commerce as its core channel. By offering goods which are not available anywhere else, customers have to buy them directly from the brand. In this way, you own your own margin and you don’t have to compete with other sites selling your brand.

This is the core of the strategy of players like Bonobos in menswear and Warby Parker in eyewear. As I’ve spent the last six years of my life pursuing this strategy, I have a lot to say about it. Suffice it to say that I’m extremely long this business model, it is my life’s work, and that the only “issue” with it is it takes time to build a brand. At the end of the day, you’re not building an e-commerce company, you’re building a brand that has e-commerce as its core distribution channel. The difference is subtle but momentous.

Indeed. From time-to-time, I like to highlight “VC wisdom” that I find around the web, so why not highlight “founder wisdom” when I find it? 

Bonobos CEO Andy Dunn wrote a fantastic Medium post about the challenges of building a meaningful e-commerce business. It should be required reading for any founder who aspires to build the next Zappos, Warby Parker, Bonobos, etc. I’m not going to try to summarize his blog but will just post the link. It’s that good. If you have the time, you should head over and read the whole thing. 

(Thanks to my buddy Daniel for showing me this.)

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