Play where no one else will.
I published a blog on valuations a while back examining the difference between EU and US valuations and the potential exit values of the companies. A good friend challenged me on this and asked, ‘if the data is this clear then why would any rational investor invest in an EU based company over an SF based one?’ the answer is pretty obvious, ‘you wouldn’t’. However, early stage investing isn’t a game of infinite choice — most VCs know who the ‘best’ YC companies are, there’s only a small group that can convince those companies to take their money. You can’t just be ‘the best’ as an investor starting out, you have to be different.
Investing in the best private companies in the world isn’t a just game of choices, it’s a game of access. It’s a brutal fight for 99% of investors. So if your goal is to become one of the best, what can you do to make that happen when you’re starting on an uneven playing field?
One thing I’ve tried to do in my (thus far) brief career in venture is to do mad shit whenever I can. This is partly driven by the realisation that there is always someone, somewhere, who will work harder than me. Working harder isn’t enough. To level the playing field. You have to be bolder, you have to try to be different. You also have to accept that doing this increases your chances of total failure at the same time as improving the odds of outlier success.
At Frontline we’ve a lot of things going for us. We’ve got a great team. We actually have funds to invest. Our founders even have nice things to say about us. But, we are always trying to raise the bar. We don’t just want to work with the best founders in a particular niche. We want to be the fund of choice for the best founders in the world.
If you want to serve the best founders, you have to find a way to compete with the best funds. Is that even possible anymore?
A GP at a top Bay Area fund once asked me would I be happy being the best VC in Europe. I thought that being wildly successful, wealthy and having helped in a small way build some amazing companies then it wouldn’t be a bad outcome and quickly followed up with a yes. His response was, ‘now tell me if you were a footballer known as the best player in the Scottish league would you also be happy?’
The analogy was half joke, half ‘this is the way the world is’. All VCs shudder when a founder they love tells them they’re also talking to Sequoia, Benchmark or a16z. The organisations practising the craft of venture capital at the absolute highest level are still all HQ’d in the Bay Area. If any of those funds really want to win a deal in Europe, I still think they can. Just like the worst team in the Premiership can probably take on Rangers most days of the week.
The reasons for this are partially fuelled by incumbency — venture is a business that heavily favours the established brand and if managed well those brands compound over time.
invest in good company -> company is successful -> drives returns -> drives brand -> increases firm experience -> leads to better deal flow -> investing in good companies -> hire better GPs -> drive returns etc….
Yet, even with the huge advantages their brands give them, top funds don’t rest on their laurels. Sequoia announced a new GP in Europe over a year ago and soon after that Lightspeed, General Catalyst, Bessemer and a bunch of others followed suit. These funds are all following in the footsteps of Accel and Benchmark (now Balderton) when they set up their offices in London more than a decade ago but now the pace of innovation in VC has changed and when one of the big players makes a move it’s no time before several more are doing the same thing.
So, if you’re trying to win in this environment of increasing competition, bigger funds, and no major increase in the number of startups being founded. What can you do? If you play the same game as everyone else you’re going toe to toe, over and over again. That is a game you can’t win.
You have to play where they won’t. You have to go earlier; three of the last four investments we made at Frontline we committed to before the company’s legal entities even existed. You pay more; two of our last six deals were the most expensive seed rounds we’ve ever participated in. You have to be madder; our most recent investment was in an 18 year old building a long term competitor to AWS and GCP. You even actually try to be helpful. But it’s not enough to push the envelope once or twice — you have to make it part of your culture.
Funds that don’t need to find new ground to fight on are the funds that will eventually decline. Index, Balderton and Accel taking their eyes off European Series A left new space for Blossom to emerge. That gap was fast recognised and is now frothing with US funds and renewed zeal from the original European heavy hitters.
Funds that think raising a bigger fund is fighting a new fight are deluding (& enriching) themselves. You’re just doing what everyone else is doing. Masa was the true example of fighting where no one else would by raising the 100B Vision Fund. Longer term I think it’s going to prove to be a massive result and cement his legacy as one of the worlds greatest tech investors — and powerpoint slide makers.
Unfortunately many of those fighting on new battlefields will have picked the wrong ones and won’t ever make it to become an incumbent. Yet it’s the only path you can take if you truly want to be great and are starting from the bottom. Many incumbents will still survive despite little originality thanks to the power of incumbency and a few rounds of luck.
This is true for a small VC fund as much as it is for any startup. You need to reinvent what you’re doing at every stage. Whether that’s tightening your focus (for us on b2b software). Launching a new product (our growth fund focused on helping companies with European expansion). Or progressively going earlier and earlier to get to the best founders or employees before they themselves realise how great they can be. You work as much as you can to be different.
Hedge funds doing three growth rounds a week on the founder friendliest terms known to Earth. Kylie Jenner cutting out the tax of an endorsement deal and selling directly to her audience. Bryson DeChambeau getting ripped as hell to drive a golf ball 400 yards.
The best companies and people aren’t ever trying to be good at the game. They’re trying to change the game they’re playing so that your competition doesn’t even know the rules. That includes VCs, startups, and everyone involved in the big game that is the professional world.
It’s non zero-sum and the rules are ever changing. Try today to think about why what you’re doing is different — it’s the difference you bring to the game that gives you the best shot at winning because it’s not possible to be ‘the best’ in a game this complex — all you can do is be different.
This is kind of an evolution of my thinking from 18 months ago when I became a principal at Frontline. Moving from ‘do your own thing’ to ‘actively try to be different’ — groupthink and the nature of the current fast moving pattern matching world often tricks you into thinking you’re doing your own thing when you’re actually following the crowd, it is legitimately hard to know sometimes.
Thanks to Caro, Helena, Tom & Ben for the proof reads. Much appreciated as always.
