Jarvinian: To save VC, specialize

Jarvinian Fund focuses on wireless, says LP dollars are too concentrated in generalist hands.

Most big-name VCs are generalists. Ask what they’re looking to fund, and, you’ll likely hear something along the lines of “enterprise, cleantech and gaming.” In any other industry an appropriate response would be, “Wait, what?”

This is why I find Boston-based Jarvinian interesting—they’re a small fund laser-focused on resolving what FCC Chairman Julius Genachowski recently referred to as a “looming spectrum crisis” in wireless. That means the partners spend their time, and all of their targetted $150 million, getting to know the needs of big potential acquirers and key players in just that one industry.

I shot Managing Director John Dooley some questions about his model and the venture industry’s future. He thinks part of the problem is the division of VCs' attention too many sectors. “The very modest amount of available venture capital is in the hands of too few funds and the opportunities they are committing to represent accommodations for generalist strategies, and are, ultimately, not worth the risk associated with the venture asset class.”

Could specialization be feature of the post-apocalyptic venture landscape?

MB: How and when was the firm formed?

JD: Jarvinian was first formed two years ago. Tom Eddy, Chris Carter, and I were thinking about both venture capital and the wireless industry. We felt that both were at a crossroads. Venture funds had drifted away from true industry specialization and their returns were showing it. At the same time, it was becoming obvious that wireless networks were rapidly approaching some very serious technological roadblocks.

Before we began raising the fund, we spent a great deal of time looking at the market, building a robust deal flow engine, and, most critically, working with likely acquirers to understand their needs for technology. Our intention was to build an institution that would endure in this industry well beyond Fund I.

MB: Seems Jarvinian is pretty laser focused on wireless infrastructure. Do you plan on branching to other sectors, or staying focused

JD: We are looking at a number of wireless sub-sectors, particularly advanced materials and components. However, infrastructure is our specialty for a number of very significant reasons.

Jarvinian was founded in response to a simple but profound reality…the emergence of wireless as a primary global medium. Today, more than 4 billion people use wireless networks for voice and data. This is an extraordinary number that reflects the ability of wireless to take root and dominate in virtually any market.

As breathtaking as the dramatic expansion of wireless has been, the industry is today facing a serious capacity problem. Unlike fiber optic networks that enjoy virtually unlimited potential capacity, wireless networks have only a small and finite amount of radio-frequency spectrum with which to deliver their services. For example, a single piece of fiber-optic cable slightly thicker than a human hair can hold more than 5 million times the bandwidth typically allocated to a major wireless provider.

Additional wireless spectrum allocations are, at best, band-aid solutions for capacity. Even if we could deploy all frequencies that are technically viable for urban network operation, it would still represent only a very small fraction of that necessary to satisfy demand over the coming decade. Instead, the long-term solution will be found in new technologies that efficiently recycle limited spectrum resources in ways that exponentially expand network capacity and reliability.

The dependence upon new technologies to ensure the long-term viability of broadband wireless makes the space extremely attractive for venture investment. This is especially true when we consider that the bulk of these new technologies will come from startups in the infrastructure sector and that the majority of our peers in the venture capital arena don’t deal well with the complexity of infrastructure technologies.

We know what spectrum costs, we know what churn costs, and we have a pretty good idea of what missed opportunities in broadband service revenue cost. When you use these numbers to assign values to new technologies that multiply capacity, the potential of these underserviced areas in venture is very difficult to understate.

MB: Interesting time to start a new fund--lot's of competition for shrinking LP dollars. Why the decision to launch this now?

JD: We don’t think about LPs as much as we think about opportunities. The opportunity to fund innovation in wireless that solves looming industry-wide challenges exists now. By extension, the ability to achieve high multiples by gaining positions in young technology bearing companies exists now. We simply can’t wait for venture to be fashionable for large LPs again.

By our estimation, the LP universe that venture funds have relied upon over the past couple of decades is in rapid decline and so is the venture industry that it has created. The old guard cries that the venture model is broken, that there is too much money in venture chasing too few deals, and that the value of new technologies is low. Thoughtful people everywhere must acknowledge that this is nonsense.

The truth is that the venture model is not broken, but rather that it is being tragically misapplied. The very modest amount of available venture capital is in the hands of too few funds and the opportunities they are committing to represent accommodations for generalist strategies, and are, ultimately, not worth but the risk associated with the venture asset class.

The LP community has evolved a set of investment principles that reinforce bad habits and structures in venture funds, while the venture community itself has become complacent and failed to invest in the types of fundamental innovation that historically helped define its position as a superlative portfolio enhancer.