Venture Capital’s Tectonic Shift: Fewer Constraints and More Opportunity
No matter where you look—public equity or private, bonds or banknotes, crypto or collectibles—the economy is dire straits. As interest rates rise and valuations fall, investors and consumers alike are scrambling for safety and stability.
Unfortunately, like a black cat on a moonless night, security is near impossible to track down. They say that a picture is worth a thousand words. In this author’s humble opinion, the below three paint quite a grim one:
What’s more, longtime standout and allocator darling Venture Capital has not been immune to the carnage:
Though the capital markets resemble Celeste Ng’s bestseller (i.e. Little Fires Everywhere), all is not lost. After all, one ought not run out of the store when there’s a fire sale on (pun very much intended).
Stonks partnered with the brilliant Norman Winarsky for reassurance amidst these turbulent times. From his experience co-founding Siri (yes, that Siri) and launching more than 70 companies with a total market value of over $70B as President of SRI Ventures, Norman is a veteran of numerous venture campaigns.
Norman currently works as VC-in-Residence at Platform Venture Studio. As a Venture Studio, Platform creates and builds startups by partnering with world-class founders. Their role is that of a co-founder. As a co-founder, their primary contribution is labor, not capital. Platform brings its studio team, fund, methodology, and network to bear to significantly increase the chances of success, and decrease the time to get there. They aim to be the best co-founder anyone could ever hope to have.
We are in the midst of a challenging economic period, and fundraising for nascent ideas and fledgling businesses will no doubt be much more difficult than a year or two ago. As we stand at the precipice of recession, startup valuations will inevitably contract, and VC funds will have more difficulty raising funds from LPs.
All that is largely understood. However, what’s more subtle is the irreversible tectonic shift that has quietly occurred. Its result: Venture Capital will never be the same, and founders of startups will have far greater opportunities than ever before.
Venture Capital Post-COVID
We are now living in the post-COVID era. When COVID first hit in March of 2020, venture capital firms prepared for the worst. This type of event has happened before both in 2001 and 2008, and firms ran identical playbooks:
- Stop virtually all investment activity.
- Shut down companies that couldn’t survive without additional investment.
- Help remaining portfolio companies survive by giving them care, (sometimes) capital, and support.
- Warn that we are in a “crucible” moment.
- Encourage startups to reduce spending and lay off any non-essential team members.
- Focus on generating revenue.
- Note that if a startup makes it through the bad times, it will emerge a stronger, more resilient company.
And yet, just a few months later—in the midst of a pandemic, no less!—something remarkable happened. Venture Capital firms began to conduct remote Zoom meetings with startups seeking funding and found it tremendously effective.
Some conservative VC firms agreed to consider investment if (1) someone within their network provided a good reference for the founders and (2) someone actually visited the startup at their location.
Others were more aggressive and moved ahead without either constraint.
This new approach worked very well. VCs learned that in most cases they could effectively diligence the team and their company remotely.
Though almost no one traveled or commuted, everyone was back to work. Working longer and working harder. Working even more effectively because a major limitation of VC opportunities all but disappeared: geographic distance.
Out with the Old, In with the New
It used to be that a VC was reluctant to invest in companies if they were more than an hour’s drive away. If that close, they could easily attend a board meeting or visit the office. Beyond that, VCs often felt that their ability to help the teams they invested in was directly related to their local network of entrepreneurs, partners, lawyers, financial professionals, universities, and labs. If the company was too distant, the VC’s networks were not useful. This aggregation of talented people and networks is what made Silicon Valley so successful for so many years.
Additionally, upstart, ambitious founders almost always had to live and work in an entrepreneurial center like Silicon Valley because of local network effects. Oftentimes you could do in days what might take competitors months or years. Entrepreneurial ideas and the whole venture capital ecosystem were there and constantly circulating with energy and enthusiasm. If you believed in an opportunity, others could help you and work with you.
You were in the flow, and this flow was neither a trickle nor a rolling wave. It was a rapids. It was exhilarating.
The days of COVID-19 changed everything about this. The world of remote work is with us and has broken all geographic boundaries. Founding, investing, advising, and building a transformative startup can be done anywhere — as long as you have access to the knowledge and experience of other great entrepreneurs, founders, investors, and mentors. More, these resources (i.e. Stonks) are all increasingly available to founders no matter where they live or work in the world.
How do Founders Create and Build Startups in this New Era?
When founders have a great venture concept, they need to:
- Learn how to create and build a startup
- Assemble the best possible founding team
- Win investment interest from VCs, Angels, and other investors
- Move quickly and stay in the flow.
Each of these four elements is now possible with our increased interconnectivity and the widespread acceptance of remote work.
The playing field has never been so vast, level, and attractive. If you don’t take my word for it, take Bill Gurley’s:
Let’s take them one at a time:
1. To found and scale a great company, founders can learn the essential elements from advisors, mentors, or venture capitalists, as well as from books, blogs, podcasts, and more. This learning cannot be minimized. The process of building a venture is complex. Some people say the process of going from a startup to a major company is like folding a small paper airplane, flying it in the air, and then building it into a jet aircraft, but doing all this while 30,000 feet above the ground. In the post-COVID age, founders can obtain much of this advice and support remotely.
2. Founding teams can now be located virtually anywhere in the world. Many major difficulties are now gone. Immigration, visas, travel, and uprootings of families and live to new locations are not as important. A founder is now able to recruit the best of the best, wherever they may be. There may be occasional travel, but relocation is no longer a necessity.
3. Most VCs are now open to opportunities throughout the world. Often the venture capital team themselves, including the general partners, analysts, scientists, and support, are located throughout the world. Startup founders can be virtually anywhere. Consideration of these startups is limited not by geographic location but by the quality of the startup and by the expertise and experience of the VCs.
4. Founders must be in the flow. They need to be able to engage with entrepreneurs, partners, customers, competitors, and advisors constantly. Much of these discussions are now done remotely, with no concern or need for physical presence.
The digital world has unbound both the world of the entrepreneur and that of Venture Capital. In this unbundling lives phenomenal, generational opportunity.
History shows some of the best opportunities come in bad times, not good ones.
Though we’re not in the business of prediction here at Stonks, in the words of Lord Byron: “The best prophet of the future is the past.”
Put simply, if public/crypto market turmoil persists, early-stage valuations may well drop ~30% or lower (i.e.below levels seen merely a year ago!).
If that happens, don’t run out of the store when there’s a discount. You would do well to heed Warren Buffet’s advice to be greedy when others are fearful.
Who knows? Such greediness may provide a generational opportunity to invest in quality businesses at bargain prices. Caveat Emptor.
Build and invest accordingly!