What can we (French VCs) learn from the latest in the Silicon Valley VC industry ? A trip report
I have been to the Bay Area several times and I always come back charged up with a serious influx of energy! It was definitely the case in previous years when I was running innovation in a large enterprise, whether I was sourcing tech startups for us to use, or accelerating our own “intrapreneurial” projects. Last week, I had the opportunity of spending time with the local VC community to discuss market trends, best practices, culture, and get a feel for their vision of the European market. The Bay area remains Disney World for entrepreneurs and VCs — it’s all bout the next entrepreneurial project out there, which famous founder is working on what, the latest exit, the next one, and overall a lot of awesome talent popping 200 great ideas everyday… And my poor brain sometimes finding itself in a shortage of RAM and CPU to process all of this :-)
So what came out of it? In a nutshell, if we (French VCs) feel our market is getting competitive, it’s nothing compared to the Bay Area! And beyond a price war that drives valuations up, access to high quality dealflow and our ability to process it super fast is the lifeblood of the work! Yet, if competitive, what stood out is the importance of relationships that remain key in sourcing, and if self- and firm- level marketing is a must, technology is increasingly being used to augment decisions. Speed is of the essence to catch the next deal, and competition drives valuations up. This is potentially an opportunity for European B2B startups that are perceived by silicon valley VCs to be more capital efficient, with less strain on engineering talent sourcing.
An ultra competitive environment
Marketing / branding / positioning at firm and individual level is getting increasingly important — it always has been the case, but with new VCs firms popping out every month, it is important to be very specific in your positioning and investment thesis. Only very large firms benefiting from a strong history, demonstrable performance and $B++ funds can afford to be more generic. Others have heavily invested in self marketing on specific businesses, spending considerable amounts of time publishing and open-sourcing their knowledge: if you are a B2B SaaS company, you’re more than likely to approach Jason Lemkin for example. VC Firm NFX has hired a VP of Marketing to tell their story and stand out from the crowd. YES VC claims they invest in companies that can create “movement”: they look for word-of-mouth and community adoption, resulting in a lower CAC. This is broad from a technology point of view, but very specific if you look at the adoption models they invest in. As for us at CapHorn Invest — and the individual investors that make up the firm — this means two things: (1) doubling down on our value proposition at firm level, where we leverage our senior executives LP network to accelerate our startups access to key enterprise decision makers; and (2) at partner level, building very specific individual investment theses that entrepreneurs, know, recognize and understand.
In this market where “everybody is a VC”, where projects abound and valuations are going through the roof on account of the availability of capital, I discovered a new “pre-seed” investment category, which sits between Angel and seed funding, to address funding needs between $250K and $2M — the new entry level for seed. In essence, this is a shift vs. the French market where a local series A corresponds to a seed round in the Bay. The emergence of that new, pre-revenue category has also led to the generalization of new investment vehicles, such as the SAFE (Simple Agreement for Future Equity) that was invented by YCombinator and that pre-seed VCs have mainstreamed. These can be piled up from several investors and you therefore need to be able to live with investing without knowing what your post-money will be! Definitely saves time on building cap table models in your investment note…
Competition means you need to be very fast and nimble: It apparently is not uncommon to send term sheets within 2 days from the first meeting — and that not only applies to seed rounds: I met an entrepreneur who raised a $15M series A in 7 business days (first meeting to term sheet). Although this is a bit mind boggling, we have a lot to learn for that risk-prone environment where writing a full-fledge investment document and running proper due diligences is not even possible in that time frame. Key take-away for me: invest in companies that deal with technology / verticals / business problems that you are very familiar with and use more of your guts — relying on experience-based expertise — in making decisions. This is also why I have refined my investment thesis (upcoming post).
Relationships are the name of the game… But technology will augment the modern investor
In this ultra competitive environment, relationships matter more than ever. It’s all about people, and you need to constantly build, maintain, and enrich your network. Some do claim that the best deals are pre-empted by old boys clubs on Sand Hill Road… Regardless, you need to be known for what you do, for your differentiated approach to the business, and for the value you will deliver. Not so different from our local French VC market, yet exacerbated by the stiffness of the competition in the Bay area. They simply need to be better at it, therefore there’s quite a bit to learn from them!
Some funds like VC firm NFX are taking this to the next level by investing heavily in facilitating VC/startup relationships: they have built several products, based on a detailed database of qualified investors and startups, where the latter can find the appropriate individual VC that will best support their business and match their needs. They have furthered it with a product that provides fundraising advice for entrepreneurs and tools to help build their pitch deck. This is a heavy investment in several highly qualified FTEs, be they coders, marketers or product people… and a proposition that is very altruistic and novel as long as it’s open sourced — something I yet had not seen elsewhere.
While the aforementioned initiative is quite unique for a fund, technology is everywhere to manage dealflow and augment decisions. Deal flow management is handled by most if not all VCs through SaaS or in house CRM systems (Salesforce seems to be widely popular). But the modern thing really is new in-house developed software that scores dealflow leveraging AI. Beyond in-house software, a research team out of NYU’s Stern Business School has built AINGEL, a startup that serves the VC industry by scoring founding teams on their likelihood of success, based on their personal traits/attributes and team complementarity. As much as you can question the algorithms, 80+ VC firms have already adopted them. Will AI replace the judgment of investors? I don’t think so. But will it enhance their ability to quickly identify the right teams for the right projects and make quick investment decisions ? Surely. Will the technology forego companies that will grow the list of some funds anti-portfolio? Definitely! Hence, to be used with caution and conscience.
All of this led me to think we are on the right path: At CapHorn Invest, we have built a customized CRM system based on CITRIX’s PODIO to manage our huge database of contacts, our dealflow, and to automate some of our work, especially in relationship management, startups follow-up, business development and fundraising. This is an immense piece of work which I believe will help us stand out in the long term, and which was definitely required to make the most of a proposition whereby we leverage a 270+ senior business leaders individual LP community to support our startups business development efforts.
What are our next steps then? I see two potential opportunities based on what I’ve seen in the valley: (1) Infuse a careful dose of AI to better manage a dealflow of 1800+ opportunities per year; and (2) As I, along with my partners at CapHorn, am a strong believer in intra-industry collaboration, we need to find a way to automate the sharing of opportunities that would not meet our investment thesis with our VC peers. Because in the end, it will serve the founders, and this is what this industry is all about, beyond mere financial returns.
Did this valley trip inspire me? Of course it did. Did I learn? An awful lot.
But what about you, fellow VCs ? What do you think we collectively need to improve to better serve entrepreneurs? And to serve our LPs with the returns they expect?
And what about you, entrepreneurs ? What do you expect of us, the VC community? Where should we improve? And what should we take home from the US market ?