In the new normal for VC, builders will win

by Ana Lopez

Although this is allowed might be a tough pill for some investors, we’ll never go back to the days when venture capital firms could win by being the only term sheet on the table – the industry has raised too much capital to make that possible, even for the most exceptional startups.

While VCs continue to fund themselves, as the hedge fund and private equity industries have done in recent decades, VC firms must win with information advantage or by building the power and founder relationship to beat competitors head-on.

Offering startups more money at higher prices has recently been a popular way to secure allocations in desirable companies, but whether such decisions were backed by rigorous and compelling data has often been questionable.

Either way, there are indeed legitimate, hard-earned info asymmetries that lead to unique deal access: exceptionally intimate founder relationships, superior sourcing processes, ability to synthesize clear propositions, and so on.

There are also ways to win in purely competitive scenarios where VCs have material information their peers don’t, but I wouldn’t bet the vast majority of companies get much more than the marginal allocation left by a16z, Sequoia and others large, sophisticated companies.

In any case, it seems clear that the winners of the business over the next decade will be full-stack firms that continue to fund the sector and boutique firms that successfully leverage specific networks or knowledge bases. Looking deeply into each founder’s vision and initiative is the only way forward.

So, how are companies evolving with this in mind?

Collect Deal Stream: It takes a village

Sequoia innovated years ago with their scout program. In retrospect, it seems obvious that affiliate operators tend to get the first look at founders who go out to build a business. But at the time, this deal-flow strategy was quite unique.

Since most companies today have copied or considered the structure of the scout program, the deal flow is becoming more commercialized. We are approaching the limit of how many companies can offer scouts in terms of carry or check sizes. Loyalty is limited and the deal flow often spreads quickly 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 internal team could ever find on its own.

AngelList has done a great job with Rollup Vehicles (anyone can be an Angel), SPVs (anyone can be a GP), and Funds/Subscriptions (anyone can be an LP). The data collected by owning this infrastructure is almost unparalleled and enabling this functionality makes a difference to those who use it.

Companies that consistently write small LP checks to emerging managers have also done a great job of “buying” deal flow on a large scale. For example, A16z systematically evaluates the investments of angel, micro and seed funds they support. What an excellent way to get a scoop on future rounds before formal founder-led processes!

These examples represent two extremes: tools like AngelList “arm the masses” of the tech world, while a16z’s strategy works well for people with billions of dollars to invest.

I expect companies to be very deliberate and experimental in finding new ways to organize outside procurement networks with new incentive structures.

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