Barbells and Experiments
via Reddit / r/Oculus
Dying VCs are Great for Entrepreneurs
It was an exciting moment.
The first episode of the new season of Justified was on iTunes. I bought the season pass and sat down excited to watch Raylan Givens and Boyd Crowder convince me that moving to Kentucky to drink Bourbon and shoot people was an actual “thing.”
As seems to be the norm these days, I picked up my phone to play with Twitter while watching the show. About halfway through, I got into a discussion with five investors that while are very different in style and stage are all very focused on supporting entrepreneurs and the ecosystem.
It started with Semil Shah, who tweeted out:
Before my time, but folks say there were 100s of big VCs back in 99-00 bubble. Accurate to say today’s explosion consists of micro funds?
Now this is a very true statement. In the first boom and bust, raising a venture fund was pretty easy, and everyone was investing in the tech sector. It’s one of the reasons things like the bastards of Wolf of Wall Street existed. Money was almost growing on trees.
Today, it seems that raising a seed fund is not particularly difficult. Semil himself raised a small micro fund called Haystack.
Semil’s style is very professorial. He likes to spend time with the entrepreneur and understand the segment, and once he believes in the founder and the segment, he is very loyal.
Marc Andreessen responded to Semil’s tweet by saying:
Yes. Although there was explosion of individual angels then too.
One of the things that Brad Feld cites as a reason for the growth of the Boulder tech community was that enough angels came on the scene to inject capital back into the community. Those angels came out of exits and increased value of companies like Sun, Storagetek and others in the Boulder Valley. Same was true for the folks that made money from Google, Apple and others in the Valley.
Marc is one of the godfather’s of the entrepreneurial ecosystem. I’ve never met him, but all the founders he has backed that I know and what I have seen from his writings and interviews is that he gets excited about the possibility of ending the impossible. His big is just a whole different level.
Chris Dixon joined into the discussion by writing:
it’s gotten more barbell shaped. Really big VCs and seed funds but fewer mid size.
This is where I stopped watching Justified (which in itself is an amazing moment. I love that show), and perked up.
Over the past several months, I’ve had conversations with several investors and venture firms about post-Graphicly, and it became clear to me that the venture community had hard shifted. A bunch of seed funds, an enormous amount of big fund VCs, and a small number of folks in the middle.
Initially, as an entrepreneur this scared me. More and more older mid-sized venture funds were dying. Some were “shifting focus” or “rebranding” or partners were “moving on,” but the between the lines writing was that they were getting squeezed out of deals, and their returns were, well, stinky.
This had a major effect on the entrepreneurial landscape, where the midsized funds served the purpose of taking a company from the early seed / angel round into the late-stage big boys. If they no longer existed, then the only companies that could make it were either early profitable companies or clear hits.
Yet, some of the strongest companies today hit periods of difficulty. If we removed the midsized funds, then the time needed by these companies to grow disappeared.
Chris Dixon may be my favorite investor type. He has a great ability to meld the logical of the engineer with the empathy of the product manager. Inherently understanding the type of people that make great entrepreneurs and then being extremely supportive throughout the life cycle is a rare trait.
makes true value shine and fence dwellers die. Those companies that need time don’t get it anymore.
When I get asked about why an entrepreneur should take venture funding, I often say the same thing “It buys you time.” Time will kill a startup faster than almost anything. The secret to being a great entrepreneur is understanding how to manage time, get more of it when needed, and calling it if its the right thing to do.
On the surface, a barbelled venture community would appear to be a detriment to the entrepreneurial community. The Series A Crunch! Run for the hills!
But instead it’s healthy.
Right now it is too easy to raise money. Way too many derivative businesses (I got a pitch this am that in a single sentence described how the product was like Snapchat, Tinder, Instagram, Facebook and at least four other products). Way too many entrepreneurs looking for the fast flip rather than the big idea.
Many VCs have become pussies. The risk aversion is through the roof. Interesting ideas that need mentorship and, yup, time, are being passed over out of what must only be fear. Pattern matching and other venture skills are driving decision making, rather than gut, experience, research and balls, and any deal that has any hair is being passed over due to a bloated pipeline of deal flow.
Of course, to be fair, it’s hard to pick winners when the flotsam is so thick that the jetsam looks like hidden treasure.
Satya Patel, of Homebrew wrote:
some good seed funds will move upstream. new seed funds (but fewer) will emerge.
Seed stage funds will die. The good ones will move upstream and fill the void left by the midsized funds whose time has passed. But, the seed stage funds that survive, will survive because they understand not only how to pick winners, but how to cultivate success through more than checks and rolodexes. Mentorship and partnership between VCs and founders has created a new dynamic that will carry over as seed funds grow.
I don’t know Satya, but I do know his partner Hunter Walk. Hunter’s believes strongly that VCs have to rethink the relationship between founder and funder, and he is right. I believe they will figure it out. When Satya’s name comes up, the first words spoken are “He is such a nice guy.” Super important when looking for your first investor. I look forward to meeting him one day.
For seed stage funds to succeed, they will need to take bigger swings. Entrepreneurs will have to take a holistic approach to developing big ideas that lean more towards Bitcoin, virtual reality and effective resource distribution and management than the Uber for socks.
Nabeel Hyatt wrote:
Actually comfortable with barbell (series a crunch). Means tons of experiments, but few breakouts.
I truly believe that this is the reality that Silicon Valley was built on, and I am excited that investors are realizing that the past is prologue. Big ideas. Big bets. A few wins. Those wins create angel investors. Those angels invest in great founders, and the cycle begins again…
Nabeel is hidden gem in the venture community, and I don’t say that simply because he is a friend. Spark Capital has done a great job of collecting partners that share deep IQ and EQ and are able to be both supportive and directive in their advice.
There is a washout in the midsized and seed stage venture firm happening/coming. It is a good thing. Scarcity breeds success.
Having less early money will force entrepreneurs to think bigger. It will force investors to take bigger bets, and the ecosystem with thrive.