Although this may Being a tough pill for some investors, we’ll never go back to the days when VCs could win being the only term paper on the table — the industry has raised so much capital for this to be possible, even for the most extraordinary start-ups.
As VC investors continue to fund themselves as the hedge funds and private equity industries have done in past decades, VC firms must win the information advantage or by building the strength and founder relationship to beat competitors head-on.
Offering startups more money at higher rates has recently been a popular way to secure assignments in desirable companies, but it is often questionable whether such decisions are backed by rigorous and compelling data.
Regardless, there are indeed legitimate and hard-won information asymmetries that lead to unique deal access: exceptionally intimate corporate relationships, superior sourcing processes, the ability to put together clear theses, and so on.
There are also ways to win in purely competitive scenarios where venture capitalists have material information that their peers don’t, but I wouldn’t bet the vast majority of companies get much more than the margin allocation left behind by a16z, Sequoia, and other large companies. developed companies.
In any case, it seems clear that the project winners over the next decade will be integrated companies that continue to fund the industry and boutique companies that successfully leverage specific networks or knowledge bases. Looking deeply into each founder’s vision and initiative is the only way forward.
So how do companies evolve with this in mind?
Aggregating Deal Flow: It Takes a Village
Sequoia has been innovating with its Scout program for years. In hindsight, it seems clear that plugged-in operators tend to have a first look at founders who innovate to build a company. But at the time, this deal flow strategy was somewhat unique.
These days, with most companies either copying or considering copying the structure of the scouting program, deal flow becomes more of a commodity. We are approaching the maximum amount of companies that can offer scouting in terms of load sizes or checks. There is limited loyalty, and deal flow often finds itself going viral anyway.
The advantage is no longer in the concept of a scouting program, but rather in new ways to find more deal flow than an in-house team could ever get on its own.
AngelList did a great job with Rollup Vehicles (everyone can be an Owner), SPVs (everyone can be a GP) and Funds/Subscriptions (everyone can be an LP). The data collected by having this infrastructure is almost unparalleled, and enabling this functionality makes a difference to those who use it.
Firms that constantly write small checks to junior managers have done a great job of “buying up” deal flow on a large scale. For example, a16z systematically evaluates the investments made by angels, the “small” ones, and the seed funding they support. What an excellent way to get a scoop on future rounds before the founders run any official operations!
These examples represent two extremes: Tools like AngelList “weaponize the masses” in the tech world, while a16z strategy works well for those with billions to invest.
I would expect companies to be very intentional and experimental in finding new ways to organize their external supply networks with new incentive structures.