Venture value propositions (was: Fulfill all your fantasies here)

Really good post from a while ago somehow made it back up my radar from Roger Ehrenberg on designing a VC portfolio:

When I previously read it, my reaction was just “you shoot the guns you have” — sounds like anecdotal argument supporting a fund capable of raising a larger size to say “a larger size is better”. Seed funds say “oh we are better” and later funds say they are better.

Reading it now I can’t say I much disagree — seed funds have many interesting features that the later A’s abandon, only one of them is paying lower prices. There is also lower cost overhead, more diversity of deals/coverage of a market, and more founder friendly = better access.

On the other hand the A folks do get more ripe stuff.

So here is what was lost on me last time I looked, and this is the point relevant to founders: in the land of A there are fewer players. As such the fine grained differences between when you see something and your ability to hang around it are more important.

Maybe there are 20 A-stage firms headquartered in NYC. Maybe 50 but not 1,000. So it is trivially easy that every A deal in NYC will be shown to all players — they will all get access.

It is all about, then which ones you see early enough with enough context and conviction that you can get in and stay in until the thing is ripe enough to pay the series A dollar amount. The A is about being later than seed, but since your fellow A investors are all around you, you must be “better”.

Better can be “better”, e.g., the Sequoia or Fred Wilson strategy of taking your time till the thing is clearly on its way and “sniping” the deal with your prestige (not price).

Better can be better “terms” (price, basically) and Khosla was known for this for a while, maybe even now. You show up and offer strong terms and just try to get into places where you have no relationship.

Better can also be “more service” which has been the A16Z marketing position for the last year or three (though they are also using the plain old “better”) — so they have more people, services, talent, etc.

“Share your vision” is another better. We are the only firm that knows this market, has deals in the space, etc. This requires staking out a market in advance and building your brand in it.

Better “people” – they do this in consulting. I hear the pitch occasionally in venture with firms saying “our partners all built companies” (current cycle) or “all from Fortune 500” (last cycle) or “all from science” (emerging cycle).

Another kind of better is they know you better; a relationship. I regard this as non-scalable and the “poor man’s better”. It’s the kind of thing investment banks said to me when recruiting back in 1998 — in a world of Goldman, Salomon, JP Morgan, Chase, Citi, Lazard, and 30 other top banks in NYC all trying to win business. “It’s about relationships”. Great….now your business is about networking.

As a founder though this last one is actually kind of attractive, the fund that knows you well is one you know well and one of the few where you can assess all that gibberish above about “better” firms.

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