Monthly Archives: April 2020

Most VC Firms Are Fragile Partnerships, Not Institutions

A tweetstorm I published last week…

Marketing people at venture firms are always trying to figure out if they should be promoting the firm brand or the personal brands of the individual GP partners. Are there venture firm brands that are “bigger” than the individual GPs’ personal brands?

Brands that are arguably bigger than any one person include Sequoia, Greylock, Accel, Kleiner, etc. Multi-generational performance over 40+ years. But will newer VC firm brands ever outshine the underlying individual personal GP brands in a shorter period of time?

It’s rare because the VC business model is so individualistic: individual GPs, masters of the universe, eating what they kill, serving on boards solo, etc. VC firm “partnerships” are often collections of individuals more than a team (despite what they say).

This dynamic has been compounded by a modern media environment that amplifies *individual voices*. Corporate Twitter accounts suck. Authentic, personal, human voices rule. I doubt there’s a venture firm corporate Twitter account with more followers than any popular GP.

To be sure, VCs themselves tend to know all the firm brands and the associated inside baseball. But founders I speak to often know the names of human GPs first, and firm names second (if at all). “I want to pitch @rabois” more than “I want to pitch Founders Fund”

If you’re creating a new VC firm today, should you just do away with the notion of building a firm brand altogether? Look at what @toddg777 and @rahulvohra named their new venture firm: The Todd and Rahul Angel Fund Should more venture firm names simply be the names of the GPs?

The firm-wide brands that endure and outshine personal GP brands have to, in substance, operate as an institution greater than the sum of the parts (i.e. not driven by individual star GPs). Example “institutions” would be @ycombinator, @villageglobal, @join_ef, @JoinAtomic.

For LPs who want to invest in venture, in a concentrated set of relationships over a long period of time, this means they’re often investing in either a) fragile large firms, or b) stable small firms run by the founding GPs.

Large firms are fragile because GPs take their value with them when they leave. Startup founders follow human GPs. The firm brand is weak. There’s no *organization* for the LP to invest in for years and years that has a moat independent of specific GPs.

Small firms run by the founding GPs are stable because the founders won’t move/leave (usually). So the personal brand capital accrues entirely and permanently to the firm. But some larger LPs struggle with this option because it’s hard to deploy large dollar amounts into small funds.

It’s for this reason that I’m bullish (and admittedly biased) in favor of the new firms formed as “institutions” not only because of how they can add value to founders, but also for how they can serve as more reliable long term stewards of LP capital.

“Founder Bets”

Some seed stage angels and VCs — including we at Village Global — will make “founder bets” where the investment thesis is mostly or entirely about the talents of the founders, irrespective of the founders’ specific idea, business model, market, etc.

The purest form of founder bet is on a talented team with no idea at all. Simply a founder(s) who know the next chapter of their life is going to be an entrepreneurial journey of some sort — idea TBD. We call these Day 0 Founder Bets. Usually these take the form of being the first $100k-$500k into the company.

Founder bets make sense to some VCs because team matters most. Team is the overwhelming driver of startup success. Now, it’s true that a great team can’t beat a bad market, as Marc Andreessen once noted in his canonical post on product-market-fit. This leads Marc to put market above product and team when evaluating the trifecta (product/market/team) of forces that explain startup success.

But a great team — if it’s early enough in the life of the company — can pivot to a new market. As we all know, many of the great businesses of all time ended up pivoting away from their day 1 idea. So at angel stage/pre-seed/early seed, team trumps all in my opinion, especially a team that knows how to pivot if necessary.

Given the possibility of pivot, the boldest form of founder bet is when when you invest in a founder with an idea you actively dislike. You nonetheless bet on the founder to either prove you wrong (and VCs are wrong plenty!) or you bet they’ll pivot to a new idea over time.

You know what’s even trickier? Betting on a founder whose idea you don’t believe in when the founder is unbelievably passionate about it. It’s the founder who says “I’ve been obsessed with this problem for the past two years. I can’t stop thinking about it.” Normally passion’s a good thing and the more personal the passion, the better. It leads to more customer empathy, more overall persistence, and all the rest. But if it’s overriding personal passion that’s feeding a bad v1 of the idea (in the humble opinion of the VC), it may make it less likely the founder will pivot later. By contrast, some founders arrive at their initial business idea through an analytic process that’s not quite as personal. They’re not scratching their own itch; they just believe they’ve identified a market opportunity through rigorous research and customer interviews. (There are actually many great companies founded this way.) In the situations where the founder’s day 1 idea is more “analytically” conceived, it’s easier for me to make a founder bet on a founder whose idea I disagree with — because I can more likely see the possibility of pivot.

To be sure, not all seed VCs make founder bets. I know several great seed VCs who’ve told great founders, “I love you, I want to back you, but I won’t back this idea. Change your idea to X, and I’ll fund you.”

Here’s Anamitra Banerji from Afore:

And pure founder bets are almost never done at Series A and beyond. The later the stage of the investment opportunity, venture firms evaluate team heavily but also give due attention to product, revenue metrics, broader market dynamics, etc. Here’s Semil Shah:

There are many ways to make money in venture. To understand why some seed funds make founder bets and others do not, portfolio construction and overall firm strategy explain a lot. If you’re a seed fund that’s making 5–10 investments in a year, you’re more likely to have the time and inclination to carefully diligence the investment beyond just team strength. If you’re investing in 500 companies a year, a la Y Combinator, you’re more likely to say “Fuck it, fund it” if the founder possess enough raw talent. There’s simply no time to do it any other way.

At Village Global, we’re happy to make founder bets (including day zero bets when the founder hasn’t yet formed a complete idea), especially through our Network Catalyst accelerator program. Applications for the Summer ’20 vintage are now open. Amazing founders apply — we want to bet on you.