When the VC playbook needs to be rewritten
What I learned from 8 years in Venture Capital
I’ve had an incredibly formative experience as a venture investor and got to learn the job from exceptional mentors and peers from multiple vantage points. At Inovia, I got to witness, and play a small part, in building the most successful venture franchise Canada has ever seen. We had a front-row seat on the rise of a thriving tech ecosystem anchored by a new generation of extraordinary companies, including Shopify, Lightspeed, BenchSci, WealthSimple, Sonder, 1Password, Applyboard, Poka, Ada, Hootsuite, AppDirect, Top Hat.
Joining Inovia as an Analyst in 2013 at our Montréal HQ was an enormous privilege. I slowly grew up the ranks and moved to San Francisco to open the Inovia office 4 years ago. When I left my role as a Principal a few weeks ago, I got to reflect on how the industry has changed. Sharing notes with peers, I realized I probably learned more in the past 24 months than in the prior 6 years combined. And the feeling I have is familiar to many VCs who’ve been at it for the bulk of the bull run of the last decade.
I’ve tried to encapsulate some of the most exciting dynamics at play now. It was too tempting to make predictions, so I didn’t resist. They might all turn out wrong, but I felt they’re worth voicing and discussing with the broader community. The list is quite Silicon Valley-centric, but my conviction is that those exact same trends are at play in most emerging tech ecosystems in the western world.
I) The competitive frontier is moving faster than expected towards specialization on one side and full-service multi-stage VC firms on the other side.
Expect to continue to see death in the middle for firms that are good at many things but not great at one thing. When my friend Nikhil published his brilliant essay about the great battle in venture capital over a year ago, he clearly outlined the framework we’re now deeply in. We just didn’t know how quickly it would play out.
I won’t rehash Nikhil’s essay here (read it if you haven’t) but would add a few observations that have become clearer these past few months.
First, for agglomerators to compete against one another, portfolio services have become table stakes to stand a chance in the arms race. Those services are both an extension of the firm’s brand and a very efficient way for VCs to gain leverage for their time since most check writers have to juggle their bandwidth between 10–20 boards and new investments. Those services are getting a lot better quickly as incentive mechanisms are coming to force: most top analyst/associates and portfolio services teams are now getting carried interest in the core funds, not just the GPs. This is a positive shift as it encourages the entire firm to be long-term incentivized and aligned to work as a team to support founders. What’s also apparent is that some agglomerators will decide to focus on a few services they can be great at vs. doing it all. Again, talent support (executive or technical recruiting, talent and HR coaching, etc.) is the most acute need for founders and the most prevalent portfolio service VC firms provide. Yet, it’s no one’s secret weapon. I’ve been on boards where founders got help from 5 different talent teams from 5 various firms… Some are exceptional, some are not competitive, and every firm >$200m in AUM offers some form of it. On the other hand, certain firms bring deeply differentiated portfolio services, as their secret weapon. Coatue, for example, is putting its hedge fund-grade data science team to work to deliver outsized value to their portfolio companies, typically by enriching a startup’s CRM with proprietary datasets uplifting sales conversion rates. Expect to see more custom-built, specialized portfolio services flourish as they continue to be the agglomerator’s table stakes.
The second exciting observation of 2021 has been the propensity of agglomerators to continue to launch new and large Seed-focused funds. Index opened the ball in April ($200m), followed by Sequoia ($200m), a16z ($400m), and Greylock ($500m) publicly announced thus far. Those Seed funds are a drop in the bucket relative to most of these firms’ total assets under management, but the message is clear: Seed continues to be strategic for the top agglomerators. The reason is simple when considering the alternative. In a capital-abundant world, not being there at the Seed makes it increasingly harder for these firms to compete at later stages. 2020 made those examples more frequent and painful for firms who couldn’t afford anymore to sit Seed out and wait their turn. Even Benchmark, the mecca of discipline, which pledged 10 years ago that it would never do Seed investing… is now doing Seed investing.
That is precisely why a lot of successful specialists can and will become agglomerators themselves. It is very tempting for specialist firms not to remain specialists for too long. If you’re a highly successful Seed-stage specialist firm, you’ll have all the incentives in the world to raise a larger fund, do more Series A or Growth-stage investing, or expand the scope of your specialization until there isn’t any. That “Get bigger and do more” syndrome is much more apparent than the “Stick to what you do best and get better” syndrome in the industry. Even solo-capitalists like Elad Gil and Lachy Groom have upsized their funds for multi-stage investing. It’ll continue to be very hard for specialists to commit to remaining specialists.
II) Talent arbitrages are finally clearing.
Suddenly, a Seed-stage, 3-person startup can be a credible global employer from Day 1. For most of the last decade, conventional wisdom kept founders from considering globally-distributed and remote talent until a much later stage. The pandemic has completely obliterated what was already on the way: There is no such thing as a “local” talent market in tech. All Tech talent is now default-global.
Most companies start building from 2 or 3 tech ecosystems at once, especially if they can consistently attract top-decile talent across each geo they pick. Debates about which locale is best to build a venture-backed company are missing the point. The tide is rising all boats.
Toronto is the paramount example of this shift. The city saw the most significant growth in tech talent in North America. Guess what? Most founders would also tell you that the cost of Toronto technical talent has also grown by 25–50% in the last 2 years. The paradox is this: there’s more high-quality talent supply than ever, yet the market continues to feel supply-constrained (not demand-constrained) to market participants. The trend seems to hold in most quality talent ecosystems.
Another significant shift is happening below the surface [a big thank you to Allen for pointing this out]. 5–10 years ago, it used to be the case that to join a growth-stage startup (say Series B/C) vs. instead of a big tech company (say Google), you had to take a massive cut in total compensation. Because of the war on top talent and capital-rich startups, the gap between startup comp and big tech comp is narrowing. In today’s world, the cash comp is maybe 10–25% lower, but the total comp when you factor in equity with fair certainty is far more competitive, and frankly, it can be the more obvious choice. Even in the early stage world, the delta is not what it once was.
This has profound ramifications for the future of early-stage investing.
The first one is that, if the trend is to continue, it’s fair to think it’s likely that the next cohort of $100B companies will resemble Gitlab more than Google. More distributed, more hub-and-spoke, and more remote. It might sound like stating the obvious after 2 years of “remote-first” everything, but it’s essential to realize the scale of that shift. Company building will take a very different form, with new sets of decentralized governance models, new organizational designs, and new regulations (looking at you web3 and DAOs 👋).
The second implication is that VCs with cross-ecosystem and cross-cultural perspectives and networks will consistently win over those stuck in a single local or cultural echo chamber, especially when it comes to attracting talent. With abundant capital, startups now compete almost entirely on attracting and developing top talent to execute. The “operator-first” era also seems to be at its peak, and the value prop of the operator-investor is becoming increasingly undifferentiated. It still carries some weight, especially when those operators can draw from specifically relevant operating experience from someone who’s built a similar company in the same market, but generic operating experience is getting commoditized at a fast clip. Most great operators now either invest or advise on behalf of VC firms or solo, either full-time or on the side of operating. That makes high-quality tactical or strategic operating advice just one introduction away from just about anyone on the average cap table. However, what seems far from commoditized is the ability to help founders hire, develop, and retain talent. Suppose you have no operator background whatsoever but can help a Seed-stage founder attract their next 10 engineers faster/better. In that case, your “value-add” is literally worth millions of dollars in this market.
III) All partnerships are not created equal.
Every VC out there talks about “being in the trenches” with founders at the earliest possible stage. The reality is that it’s tough for most to walk the talk, especially when 1) the typical fundraising processes compress from a few weeks down to a few days, and 2) the average time between rounds of funding decreases from a year to 18 months down to 6 months. Founders will need to trust quality people, brands, and partnerships in a fraction of the time they used to have. The good news is, new tooling increasingly helps them discern signal from noise.
As a proxy for quality, the most established VC brands of the past 30 years will continue to be the quality labels founders seek. Mainly because it’s the label of quality that top talent is seeking to join their unproven startups. But, empowered by predecessors before them, challengers are entering the venture markets faster than ever, and founders will continue to empower those new players in new ways. Call that “Founder Activism.” It is the same dynamic at play when folks opt to shop with their small business instead of ordering more on Amazon, even if the price is higher. For the first time, we’re seeing “shop SMB” activism in Venture in a market where all big firms start to look alike (or like Amazon). Of course, some new entrants are trying to be better Amazon. It’s hard to talk about the venture markets without touching on how Tiger is reshaping the industry, alongside other crossover and hedge funds coming at it from the top-end (ie. late-stage investing).
But at the early stages, new competitive forces coming to market from the bottom-up go more broadly unnoticed. See how Front decided to skip the large venture firms altogether and raise with a syndicate of founders only, or how Notion carved out an allocation for Base10’s Advancement Initiative fund because they wanted to contribute to the mission. The cycle we’re in is a founder market, and founders get to decide who they pick as investors (and who will get rich if they succeed), not the other way around. That’s a real power underlying how technological innovation ultimately takes shape. And founders are increasingly using it to empower the emerging managers and “small businesses” which mission they believe in. That’s not entirely apparent yet, but there’s little doubt it will be an enormous force for change in the industry that too often still works as an insider game. Founders are arming the rebels and letting the outsiders in.
This brings me to my last and favorite dynamic at play: the democratization of venture investing. VC brands are and will continue to be more individual as transparency will improve across the board. In the dot com era, too few had an idea about how venture capital worked, how decisions were made, and who to work with or not. The system was designed to be opaque, and opacity was a competitive advantage. In the last 10 years, thanks to the great democratizers (Fred Wilson, Paul Graham, Brad Feld, and countless others), the playbook and inner workings of VC decision-making have become pretty much public. It’s all online if you need it. All of that has shifted power away from VCs in the hands of founders for the greater good of the industry. This next decade is about to take transparency to a whole new level. Just spend an hour or two reading reviews on VC Guide to get a glimpse of how information asymmetry between founders and their investors is shaking out to founders’ advantage. 80% of reviews are just fine, reverting to the mean, but the extreme 10% on each side of the sample distribution are interesting to pay attention to. VC Guide has already both destroyed a few high-profile branded VCs (or at least made it a lot harder for them to get into their next deal) and showcased incredibly talented VCs that had yet to be publicly discovered. Undiscovered exceptional VCs will gain the spotlight more quickly, while the myths behind some of the Twitter legendary VCs will get busted more quickly as well. Transparency in any free market makes that market more efficient. In Venture, it’ll mean outsiders have a fair shot and, hopefully, exceptional founders who felt they didn’t belong until now will get to run the show.
As a closing thought, I want to give an enormous, heartfelt thank you to my former team at Inovia and to the growing and thriving community of founders who entrusted us.
As for what’s ahead, I won’t be observing the venture market for too long and have been working on a new product to continue to be part of the founders’ journey from Day 1. If you have some ideas and want to share notes, reach out!
A huge thanks to Allen Miller, Ameet Shah, Angela Tran Kingyens, Boris Wertz, Chris Arsenault, Gaurav Jain, Hannah Chelkowski, Ian Rountree, John Chen, Karam Nijjar, Kevin Zhang, and Yuri Sagalov for improving early drafts of this post.
