What’s the Moat of a Venture Capitalist?
By Esteban Reyes, Founding Partner
The term “moat” was popularized by Warren Buffet, and it generally means the durable ability for a business to increasingly dominate a market without losing profits to competition. There’s different types of moats, and they become apparent as businesses scale. For example, some of the most desired modern moats are: 1) monetizable integrated network effects (Facebook), 2) ascending data leverage (Google), and asset light purchasing power (Amazon) 3). The best moats compound — meaning all additional investments into building them generate logarithmic returns.
Every venture capitalist (VC) wants to invest in companies with compounding, defensible moats. The core thesis is “buying” into them early, at a deep discount to future value, and then realizing massive returns as they grow. This is, of course, easier said than done.
Almost every VC I talk to can explain with great detail how to analyze early moats, how they can be accelerated, how to value them, and why they only want to back companies that have them.
What I hear much less about is a VC explaining what’s their own moat?
First I’ll try to define an actionable framework of what (in my opinion) makes a moat for a VC firm.
“Durable ability to dominate a market…”
- Superior expertise: best source for a specific type of knowledge. This generally means VC aggregating the brightest minds in a particular domain — people who can help accelerate the growth of a company beyond their own experience.
- Preferred Brand: being the preferred choice by entrepreneurs and investors despite offering less competitive terms. This can be general, or specific to a market or sector.
- Preferred Access: getting first look at the best investment opportunities.
“…without losing profits to competition.”
- Not losing deals.
- Not having to pay higher valuations and give up protection to get into the deals they want.
Now let’s use this framework to analyze how some of the most recognized firms have [arguably] built their moats.
Andreessen Horowitz (a16z)
Founded: July 2009
AUM: $6.7Bn / first fund was $300M
Superior Expertise: founders Marc Andreeseen and Ben Horowirtz got involved early-on with the Internet revolution. They built Netscape (Mosaic) and Opsware into successful businesses. This gave them the experience and recognition of superior technologists and entrepreneurs. Later after they scaled a16z succesfully they aggresively recruited some of the smartest entrepreneurs, product managers, and technologists to join their investment team.
Preferred Access: Even before launching a16z Marc and Ben were already sought after as advisors, board members, and angel investors. This gave them preferred access to invest early in super hot companies like Facebook, AirBnb, Lyft, and FourSquare.
Preferred Brand: a16z got media coverage driven by the success of their initial investments, which positioned them as a “top tier” VC. Marc famously coined the term “software is eating the world”. They amplified that message through marketing and PR targeting founders who had been marginalized by traditional VC after the many fiascos in the .COM crash. This made them the preferred brand for many young technical founders who other VCs wouldnt invest in unless they had “adult supervision”. These founders would go and start the next generation of successful software businesses, and a16z got a first look.
Benchmark Capital
Founded: 1995
AUM: $2Bn / first fund was $113M
Superior Expertise: Andy Rachleff, Bruce Dunlevie, Bob Kagle, Kevin Harvey and Van Valden made a great combination of experienced VC and founders. They set to build a firm that wasn’t hierarchichal and all partners would have equal share and voice. Benchmark became the best VC platform for entreprenurial type investors to develop a successful career with out having to launch their own firm. This allowed them to poach the some of the best partner talent from top firms, who were tired of working under a piramidal structure.
Preferred Access: Because Benchmark attracted the best talent they got access to some of the biggest names in the Internet era: Uber, Ebay, Twitter, Instagram, Dropbox, New Relic, Zillow, and many others. Benchmark continues to benefit from preferred access as it’s regarded (along with Sequoia) as one of “the world’s best” VC firms.
Preferred Brand: Benchmark is one of the most competitive funds for investors to access. Over the years, Benchmark’s eight funds have paid out $22.6 billion to investors. Its backers received a 1,000% gain — net of fees — over the past decade. It’s also on of the most prestigous and value-added investors a founder can have on their cap table.
Bessemer Venture Partners (cloud computing team)
Founded: 1911
AUM: $6.4Bn
Superior Expertise: caught the cloud computing wave early and positioned itself as a thougth leader in the space. Made it’s first cloud investment in 1997, and as of today BVP reports they’ve invested in 105 cloud companies and taken 19 of them public. It’s success with early investments in cloud helped them recruit top entreprenuers turned VC (i.e. Byron Deeter), and help portfolio companies find answers to tough questions regarding go-to-market and execution.
Preferred Access: BVP is a known brand given its legacy in the VC world.
Preferred Brand: In addition their success in cloud makes them a highly desirable investor for founders and pre-series A VC firms.
Conclusion
Building a moat in VC is possible, but it’s arguably harder than in software. In the end the product VC sell is access to money and expertise, which is a people intensive business. Paradoxically many VC don’t invest in people-based businesses because they‘re hard to differentiate — perhaps it’s the self-reflection that spooks VC away :-).
