Although this can Being a hard pill for some investors, we will never go back to the days when VC firms could win by being the only term sheet on the table – the industry has raised too much capital for that to be possible, even for the most exceptional . Opening.
As VCs continue to fund themselves as the private equity and hedge fund industries have done in decades past, VC firms must either win by using the information advantage or by building the power and relationship of founder to beat competitors head on.
Offering startups more money at higher prices was recently a popular way to secure assignments at desirable companies, but it was often questionable whether such decisions were backed by rigorous and compelling data.
Still, there are legitimate and hard-won information asymmetries that lead to unique access to deals: exceptionally close founding relationships, superior sourcing processes, the ability to synthesize clear theses, etc.
There are also ways to win in purely competitive scenarios where VCs have material information that their peers don’t, but I wouldn’t bet that the vast majority of companies get much more than the marginal allocation left to 16z, Sequoia and other bigs. , sophisticated firms.
In any case, it seems clear that the winners of venture firms over the next decade will be full-stack companies that continue to fund the industry and boutique companies that successfully leverage specific networks or knowledge bases. Deepening the vision and initiative of each founder is the only way to go.
So how are companies doing with this in mind?
Pickup Deal Flow: It Takes a Village
Sequoia innovated with its scout program years ago. In hindsight, it seems obvious that connected operators tend to see founders who are dedicated to building a company for the first time. But at the time, this business flow strategy was quite unique.
These days, as most companies have copied or considered copying the scout program structure, deal flow becomes a commodity. We are nearing the limit of how much companies can offer explorers in terms of baggage or check size. There is limited loyalty, and the flow of business often spreads quickly anyway.
The advantage is no longer in the concept of a scouting program, but in new ways to find more deal flow than an internal team could get on their own.
AngelList has done a wonderful job with Rollup Vehicles (anyone can be an angel), SPV (anyone can be a GP), and funds/subscriptions (anyone can be an LP). The data collected by owning this infrastructure is nearly unmatched, and enabling this functionality makes all the difference to those who use it.
Companies that consistently write small LP checks on emerging managers have also done a great job of “buying” the flow of business on a large scale. For example, a16z systematically evaluates the investments made by the angel, micro, and seed funds they support. What a great way to get a scoop on future rounds before the founders execute any formal processes!
These examples represent two extremes: Tools like AngelList “arm the masses” of the tech world, while a16z’s strategy works well for those with billions to invest.
I expect companies to be highly intentional and experimental in finding new ways to organize sourcing networks with new incentive structures.