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Aggregated my thoughts on VC in one place:

- Structural advantages in VC
- Why we need *more* founders & *more* VCs
- The case for diversified portfolios & no pro-rata
- Venture socialism
- How to break into VC
- How VC evolved
- The future of VC
- The role of pre-seed

People think there is too much capital: Too many founders, too many VCs

IMO, we need more founders & VCs

Why? Schramm's law: "The single most important contributor to a nation’s economic growth is the number of start-ups that grow to a billion dollars in revenue within 20 yrs.”
We produce ~33 unicorns a yr.

We need ~100 unicorns a year to maintain post WWII growth rates.

How can we get more founders? De-risk it.

Make median founder outcome closer to avg & by removing economic friction. Remove other bottlenecks (thread)

Indeed: There are lots of VCs who could make great founders, who would actually prefer to build a business than do a financial services job, but they just prefer the economic calculus of venture capital.

Others, to be sure, are unwilling or incapable.

We also should decrease cultural friction to starting companies:

- celebrate starting cos as a thing for ambitious ppl to do globally

- see startup failures on resumes as badges of honor instead of blemishes

- create communities to find co-founders & founder support(@beondeck)
Other things holding founders back.

Startup formation tropes are too romantic. e.g:

- had an idea they were passionate about or were perfect customer for
- knew co-founder since college
- wanted to be founder, didn't "stumble"
- founder was all-in.

But the real reason not to listen to VC advice b/c VCs don’t listen to their own advice

Irony: Although VCs believe in markets, in some ways VCs are Central Planners—a few partners deciding all investments (& prices), across all sectors, geographies, & people—even tho they can't have perfect information on all.

Venture Capital? More like Venture Soviet Russia. ;)
Just as one person could have understood all of physics at one point, it was possible for one person to specialize at “internet investing” and be an expert at all.

This is why we at @villageglobal (& others) are trying to decentralize venture:

Startup investing’s weird bc it takes 10+ yrs to be great—not bc of skills gained but bc of feedback loops

You could invest for 3 yrs, be a beginner, go in a coma for 7 yrs, come back & be known as an "expert", despite same level of skill

In which other field could this happen?
Another VC/bball analogy:

In bball you can discover Giannis when he’s 15 & he can dominate day 1

The VC Giannis has to wait yrs for their dominance to be recognized

This suggests there’s extra arbitrage in finding the VC Giannis—the ppl who are already great but not legibly so
Poker is a misleading analogy for VC, b/c it implies an equally distributed deck.

A great firm gets pocket aces every time, a bad firm never sees an ace.

What's hard isn't knowing how to play pocket aces, it’s building the machine that repeatably gets pocket aces to begin with.
In other words, ppl think VC is about sourcing, picking, & supporting cos.

Investing isn’t totally a craft (bc of long feedback loops), but it also isn’t (all) abt luck, either.

IMO it's about having a structural advantage:

VC is neither chess nor poker. It's more like war.

It’s basically your ability to rig the game—to build a machine that enables you to see & get into the best deals.

That machine could be a reputation, a network, a platform —but it has to be differentiated from other machines.
More and more of seed investing is adding so much value to founders *before* they raise so that when they do, they feel compelled to make room for you.

VC firms don't have many proprietary assets

You could steal Benchmark's playbook + it wouldn't change much, similar to how copying Lebron's regimen wouldn't let you compete

Partially bc 👇, + also long feedback loops means VC brands are self-reinforcing

Exception: YC.

They changed the game by showing that VC could:

- Scale founder support through...other founders (network effects)
- Have portfolio diversity & ownership & keep quality high, debunked “spray and pray”
- Be a franchise in Warren Buffet sense
- Pricing power
Debunked following absolutisms:

- VC has anti-network effects
- Wide portfolios compromise quality & support
- VC is not a startup, product, or platform
- There are no moats besides brand
- VC has to be an artisan craft

Of course, these are often true, but not always
VC narratives:

VCs have magic so they can pick winners.

*"The Midas List"*

They also have this magic where they can “make” winners with their help and advice.

Only they have the magic so they can only make a few investments so there’s enough of the magic to go around
If as a VC you wanted to sound the most indispensable:

- Startups are really hard to pick
- VCs can uniquely help make companies great
- Only ppl w/ VC experience can be good VCs

You’d pick a GP-centric concentrated strategy!

Wider portfolio implies picking & helping humility.
In reality, diversified portfolios can make sense too.

Why? VC is a hits-driven business. The top 2.5% of vc-backed companies—100/4,000—make up all the returns.

Getting into one of those w/ meaningful ownership is everything.

Avg unicorn rate is 2.5%.

Your fund size is your strategy.

Your best co will return 1/2 of all profit. And then the 2nd best might return a 1/4 & the next best might return an 1/8 & so on

For $100m fund, you need 1 co to return $150M, so that's 10% at 1.5B or 1% at 15B.

Need (meaningful) shots on goal
If you consider founders more helpful than investors, and investors not that a helpful, then what’s actually most founder friendly is having a big portfolio

Which is why founders love YC

After one institutional VC, there’s serious diminishing returns.
Follow-ons make sense most when they are doubling down or not at all.

Why? They are competing with every other opportunity out there, and artificially limiting to your own pool makes most sense when you have conviction.

Founders don't want to raise money from institutions as much anymore.

They want to raise money from individuals.

How VC got unbundled:
VCs have to signal that

- they have conviction in individual cos, but their incentive is to run a portfolio & hedge their bets

- they can uniquely help founders, but their incentive is to spend time finding new cos

- they are builders too, but they're financiers 1st
One bearish take on VC value add is that, because capital is such a commodity, what's surprisingly helpful to founders & angels when looking to fill out rounds is VC firms that decide quickly & transparently.
To be sure, VCs used to be able to add a lot of value.

15 years ago, the VC who sat on 10 boards had genuinely novel info to share with a founder

E.g. PM-fit, hiring, sales, fund-raising...

Now 99% of startup questions are available via blogs & online content.
Getting a job in venture capital is partly less about “who you know” and more about “who you’ve helped.”

Start creating a personal portfolio of projects that allow you to help others, especially around getting into deals, and you may break into VC

If you are looking to join a VC firm, the question the firm needs to be able to answer is:

“Is this person going to help me to invest in companies that I otherwise would not have invested in without him/her?”

How do you do this?

If you’re a up-and-coming VC trying to build a name for yourself I think there’s a big opportunity in niche podcasting.

Make the go-to-podcast for healthcare, VR, DTC—pick any topic.

It’ll build your network in that space & you’ll be the first person people think of for deals.
Some smart person looking to break into venture should create a Stratechery for early stage VC.

Take the fundraising announcements and explain & analyze the broader trends behind them.

Other ideas on breaking into VC:
Airbnb Dropbox Coinbase etc

In ~every YC co, other VCs put in over 10x more $ +time.

And yet, in founder interviews, YC gets comparable love.

That's the power of putting people in business, & believing in people when others don't.

Be first check in!
VC is very reflexive: Perception becomes reality because of long feedback loops. Get #s on the board early then if you know you want to do it long-term.

LPs don't want VCs to have big diversified portfolios b/c LPs are already sufficiently diversified

VCs don't want founders to diversify b/c VCs are already sufficiently diversified

It's Go All In or Go Home all the way down

How does COVID-19 affect LP/VC market for new funds?

Some thoughts paraphrased from a conversation with an older VC who's been through a couple cycles. Down pointing backhand index

(Curious for alternative perspectives.)

How do we fund science and longer-term projects?

Pre-seed is about proving customer value, not revenue.

Consider a restaurant: The KPI to track is not whether customers ate & paid, it’s whether they finished their plates, took some food home, and came back again.

(more wisdom from @AliBHamed)
Series A is b2b, Seed is b2c.

At Series A, your customers are the founder + other seed firms

At Seed, your customer is the founder. You need to be top of mind b4 they start co. Wide net

Explains why seed firms spend more time on Twitter & later stage spend more time networking
On VC/founder relationship being a marriage:

Maybe a more precise analogy is a divorced couple w/ a kid.

There’s some alignment, some misalignment—sometimes they want you there, sometimes they don’t—

Sometimes you flourish as co-parents, sometimes they kick you out & sue you.
Future of VC:

VC funds technical risk.

Instead of MBAs running spreadsheets trying to figure out CAC to LTV, they’re funding companies that are trying to cure cancer, develop flying cars, extend life, get us to the moon…
"I would hope that people go back and look at 2018 and 2019 and say I can’t believe that founders sold 50-80% of their companies before IPOs to pay for Facebook and Google ads. You’re basically selling 50-80% of your company to Facebook and Google." - Andrew D'Souza
"VC branded itself well, right? You have these smart people who put together these fancy websites and basically said that if you raise from XYZ firm, you’re going to be successful. But it was this false promise. It’s caused cos to take capital they wouldn't otherwise - Ali Hamed
Being a VC used to be about technical risk, then it evolved and became also about market risk.

How to evaluate markets?

Peter Thiel vs Keith Rabois approach to markets

in 2005, PG discovered an arbitrage opportunity by identifying that young technical founders were being overlooked

in 2019, with the rise of no-code & the intense focus on technical founders, perhaps the pendulum has swung + a new arbitrage opp is biz & product minded founders
Domain expertise is more important now

Software's eaten low hanging fruit & now going for more

For areas within logistics, healthcare, finance—expertise & relationships matter

We used to think only founders can learn domain expertise

But experts can also learn to be founders
Maybe this is why recently it seems VC partners have more leverage over their firms than they did before

If vesting worked differently, we'd likely see VC look more like NBA free agency--more switching. Maybe that changes overtime.

The venture firm that most captured where tech startup ethos was going in 2014-2017 was a16z imo.

In 2020 and beyond, esp if Warren wins, I think that leader may be Founders Fund (w a16z leading here too)

The difference between peace time and war time ethos
In the last decade, angel investing became a status symbol (in contrast to stodgy VC)

In the next decade, being a talent discoverer&curator will become a status symbol (in contrast to transactional recruiter)

ISAs enable this: investments become person specific, not co specific
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