The Slow & Steady Unbundling (aka Democratization) of Venture Capital
From Syndicates to Angellist Spearhead, Operator-Angel Funds, Rolling Venture Capital Funds & Solo Capitalists
|The Hard Fork by Marvin Liao||Aug 17, 2020||17|
“Investing is a sell-side product” (Phin) Barnes (of First Round Capital) stresses. “Capital is a commodity, especially in this market. What you’re saying with a term sheet is that you think the founder’s equity is worth more than your dollars.” That means investors have to close the value gap with sweat.”
Venture Capital has been awash with money in the last half decade. We’ve seen the rise of huge multi-stage Venture Capital funds in the Growth and Later stage side of Technology investing. These range from $400 Million dollar funds to $4-5 Billion dollar funds. And I have to mention the monstrosity of the $100B Softbank Vision Fund.
That’s one side of the “Barbell effect.” On the other side of the barbell, we’ve seen the rise of several hundred (estimated 800+) new Pre-seed and Seed stage Fund managers & investors. But if you look much deeper into the early stage, there are super interesting undercurrents emerging that underpin much of this.
I’m going to highlight what are some of the more interesting developments in the last half decade.
Angellist as Platform: basically Amazon Web Services for Angels and VCs:
“Shopify exists to basically arm the rebels. We want a lot of people to go out and compete against Amazon.” --Tobi Lütke, founder and CEO, Shopify
Similar to Shopify’s call, Angellist is doing the same thing for early stage venture capital. This is a continuation of the “bottoms up” unbundling of traditional Venture Capital Funds.
Angellist first did this with building the backend infrastructure. This enabled top angel investors to raise money from high networth individuals in “single deal VC funds” to invest in a specific startup ie. Syndicates. We saw folks like Zach Coelius, Gil Penchina of Flight.vc and Jason Calacanis really supercharge their investing activity through this.
Then Angellist started the Spearhead program in 2018 “with a mandate to identify promising startup founders and give them cash to invest in startups autonomously…..the program identifies promising startup founders and provides them with $200,000 of investable capital, and potentially $1 million. It also sets them up with the right legal entities to invest.”
Angellist is a big enabler of the bottoms up explosion of new investors. And the logical next development is that of the Operator Angel Funds.
Operator Angel Funds:
Fact is most founders would prefer to take $$ from other founders or people who have good relevant operator experience.
Harry Hurst on Twitter: "Early stage founders want solo capitalists with cult Twitter followings on their cap table the same way DTC non-venture backed companies want celebrities on their cap table. Brand Distribution Network Amplification @jmj, @briannekimmel, @rrhoover you're like Cardi VC"
These operators are also just closer to the market. They are able to see things that are working much faster. This is particularly on the B2B side. They’ve had to use & implement things like Stripe ,Twilio or whatever product before anyone else for their own business. They end up with deeper and more insights than VCs who are far removed from this.
Many folks running the Operator Angel Funds are CEOs or execs running significant businesses as their full time job. But the biggest advantage of their roles? They see and meet lots of startup founders and companies. This results in incredible access and deal flow.
When Ryan Hoover first started his Weekend Fund in 2017, it just made sense. He is the guy who started Producthunt and has first look at the cutting edge of startups. Why not help and invest in some of these up and coming founders while doing so. Additionally because he has a full time gig already, he doesn’t need to live off management fees. So having a small fund on the side is a great side hustle and very complementary to his day job.
From a founder’s perspective, there are many good reasons to take money from these operator investors. I agree that in many cases, they are replacing the “Friends, Family and Fools” round for some of the best founders out there.
Brianne Kimmel states that they do this “ to de-risk technical dependencies, accelerate time to launch and build momentum for the next round.”
Some other great examples besides Ryan Hoover’s Weekend Fund that come to mind are the Todd & Rahul Fund, Sri Krishnan’s Kearny Jackson are representative of Part-time initiatives.
Jeff Morris Jr’s Chapter One & Brianne Kimmel’s Work Life Ventures are representatives of the full time funds here.
The other more recent development is the “Rolling VC Funds” concept introduced by Angellist. Exemplifying the previous trend with superstar founder Sahil Lavingia or superstar investor Cindy Bi (shout out to my friends at www.diaspora.vc too). It’s probably one of the most recently talked about developments in VC.
Starting a traditional VC fund is not just hard but also just plain expensive from a legal perspective. This is on top of the brutal fundraising process of raising the money from LPs. This has been a major barrier to entry for folks who aren’t rich to begin with or who are not Silicon Valley insiders.
Rolling Funds are basically a subscription service for LPs wanting to invest on a quarterly basis in the next generation of Operator Investors. It’s also a great way to involve Operator LPs, people who are now financially aligned with you, can help you with deal flow and build out your network further. Many people in Silicon Valley are both curious and excited about this.
The implication of rolling funds is that it is an open ended fund. With this platform and ability to market with 506c (ie. Solicit), talented individuals from different geographies or backgrounds can now potentially become new VCs. We can potentially expect a flowering of new, diverse investors (culturally & geographically). They will bring much needed new perspectives in investing, focusing on new overlooked sectors, founders or business models.
For all those interested in more detail on what this Rolling Fund thing is, here is an overview: Rolling Fund FAQ: What Is A Rolling Fund?
And of course as this is a new thing, there are some questions and concerns.
This write up covers it well here.
I’m a believer that competition is a good thing for the market. But in many ways, they will also be great co-investors, even upstream investors for institutional VCs versus being direct competitors in my view.
In fact, I view these developments as a good springboard or training wheels for emerging VCs. If they do well, they can choose to continue with rolling funds or Syndicates. Or they “graduate” (i use this term loosely) to doing a traditional Venture Capital Fund similar to what my friend Zach Coelius has done (he is an awesome investor & good dude btw). And as their reputation and networks further expand, maybe they end up going the Solo Capitalist route.
I’m fascinated by the phenomenon of the Solo Capitalist here in Silicon Valley. It’s like the “Passion Economy” has come to VC. And I see this as the ultimate evolution of Operator Investor Funds but supersized by their brand name, good reputation with founders, audience and network that they’ve established over a decade plus in Silicon Valley.
Names like Elad Gil, Oren Zeev, Lachy Groom, Shana Fisher, Ray Tonsing and Josh Buckley. All of them folks who were either very accomplished founders or investors before they started doing this. Nikhil Trivedi highlights this well.
“over the last couple of years, there's been an increase in individuals investing not just at the earliest stages of companies, but at the Series A and beyond.
These individuals aren't just investing their own capital. They’re raising dedicated funds and special purpose vehicles (SPVs) from traditional limited partners (LPs).
And they aren't just participating in financings alongside venture firms. These individuals are often competing against venture firms for the right to lead rounds, and signing term sheets before the companies get to pitch the traditional venture partnerships. Most importantly, founders are choosing to work with them, in some cases in lieu of partnering with firms.”
In some ways this shows the unbundling trend of traditional and commoditized Venture Capital funds. Nikhil continues:
“The importance of an individual's brand has been steadily increasing in venture capital for quite some time. Founders are more often than not picking an individual partner who they want to work in a financing round, based on the relationship built with them, and based on their brand and expertise, instead of the firm's.
So it's a logical next step that the firm is the individual, and the brand is the individual, which is the case with the solo capitalists.”
I am personally very excited by all of these developments. If you are a startup founder or investor you should be too! This brings more diversity into the investing ecosystem and are new funding sources. Great news for founders and the tech ecosystem overall. I can’t wait to see these developments happen outside of Silicon Valley as well.
As an infamous & monstrous historical giant once said, “Let a thousand flowers bloom, let a hundred schools of thought contend.”