The VC Industry Norms Which Changed Over The Past Decade
Having spent time around and then in the world of VC in the Bay Area during the last decade, I’ve been reflecting on how different norms in the industry have changed. At the start of 2010, there was some unwritten VC industry conventions that have been tested, challenged, and upended in the last decade. I also want to be clear that there are other things that should (hopefully) change in the VC industry. That is for another post. In this post, I want to focus on what has been accepted over the past decade. So, what specifically has changed for Bay Area VC firms?
Acceptance that leading VC franchises can’t just invest in their backyard. I recall many Sand Hill firms stating a preference or requirement to invest only in the Bay Area. To be fair, not all of them held this view and many of them were investing nationally earlier, but as we flip over to 2020, there is a general acceptance among Bay Area VC partnerships that they need to be able to invest across the country, not just NYC and LA or Seattle.
Acceptance that leading VC franchises needed to be multi-stage and global. The AUM of many VC funds has increased dramatically. Depending on where you sit, it makes sense or is a recipe for disaster. To me, it makes sense, because “tech” is no longer a vertical – it’s seeping into every sector horizontally. Firms like Sequoia, Accel, Lightspeed (where I am a venture partner), Bessemer, have franchises their brand in other key entrepreneurial geographies; firms like GGV (where I used to be a venture partner) have a dual-country strategy in place from day one; and other firms have opened satellite offices in NYC, or send partners weekly to LA and Seattle. Beyond location, these firms accepted they need to view their access to talent like Facebook or Google would — for certain entrepreneurial talent, price didn’t matter as much as access does, so they’ll invest earlier (seed) and raise funds later to go big into winners and/or defend their best positions.
Acceptance of lower ownership thresholds in the best companies. I don’t have the data, but I’d bet the “minimum ownership” requirements VC funds started 2010 with have gone down dramatically. This impacts portfolio construction and possibly returns, though on the flip side, end-markets are larger and outcomes can be greater — look at Datadog, for instance.
Acceptance that leading companies expect some level of platform services. No doubt, a16z changed the game here. While I don’t think founders expect a SWAT team to show up and build their startup with them, they do expect some high-leverage support in business development, executive recruiting, and capital formation. VC firms have had to respond to this competitive dynamic by evolving their own operational model, which is not a strong suit of most VC partnerships. This also eats into the time and fee income those partnerships generated. While no one would cry for them over this (nor should they), it is now accepted as table-stakes for a top flight VC franchise.
Acceptance that firms and partners need to actively market themselves. While VCs have blogged and tweeted often before 2010, some still resisted being too forward with their point of view. What a difference a decade makes! Today, Twitter feels like it’s oxygen for VCs; firms spend thousands even millions on their websites, content strategies, marketing departments, events teams, PR workshops, and so forth. We even have folks who used Twitter to help raise their first funds and put them in business.
Acceptance that they face legitimate competition from the below and above. There are too many startups to keep track of. There are too many angels, accelerators, scouts, and seed funds who are giving them checks early, potentially diverting deal flow. There are larger firms who were traditionally only focused on growth who realize the power of holding early equity in tech and are coming down-market, even to the seed stage. It’s 360-degree competition, and that’s the new world VC firms live in.
Moving forward, in the next decade, my belief is the value set which entrepreneurs look for in VCs will change. In a previous era, it may have been more about familiarity or the perceived knowledge an investor held. Recently, the awareness a large VC brand can confer on a startup is coveted by some. In the future, I believe founders will be drawn to investors who market certain values that align with their own worldview and/or aspirations. That could be as broad as “sharing economy” funds, or as specific as investing in solutions to combat climate change. If I’m right, the next thing investors will need to accept is this — that they’ll be valued by the market for what they believe, and how they convey it — they will not be valued what they know or claim to know.