The VC Industry’s Identity Crisis
Seed funds want to be Series A. Series A funds want to be growth.
And growth VCs want to be PE investors. This is diluting value for all.
Straddling the risk/reward curve is the magic art of being a VC. The LP community wants to leverage your vision but want to make sure that you are smart and principled.
“Yes, you’re a seed fund, but how much risk can you eliminate so that I can get all the benefits of Series A out of your vehicle?” an LP may ask.
All too often the answer is “Yes, we’ll do that for you,” instead of guiding LPs on where the returns are realized for seed funds and where the firm’s strengths really are. It is process, not selection, that determines success for most VCs.
This paradigm is the core reason for the vicious cycle that is eating into VC performance, LP returns, and a whole lot of confused founders. Everyone is trying to go north on the maturity curve, while buying into companies as low as possible.
Optimizing for price in this way is a mistaken strategy for VCs. It doesn’t mean that being sensitive to valuation is a bad thing — it is imperative. But it is a fine line.
VCs: play your position. If you’re a seed fund, be a seed fund. Help founders at their core of their identity and model creation, be a trusted advisor and friend, and take big swings on awesome teams and ideas.
Don’t tell the world you’re now a “mini-Series A” investor. The smartest LPs know that these “mini-Series A” opportunities are very rare, often overbid, and dilutive to the return profile of being a seed fund.
We understand you face your own pressures and you want to show liquidity, but the seed game is a long game. If you’re not willing to put in the years, don’t try to raise early stage seed funds.
If you’re a Series A investor, optimizing for maturity and trying to get as close to Series B without paying the Series B premium is a beautiful concept but unrealistic.
I know you try to convince LPs that you have the secret sauce to make this happen, but the reality is that it is about process. Stick to your firm’s core process and pick great founders and great businesses.
Optimizing for the valuation curve in this format is extremely dilutive to value. Nearly every VC who passes on an awesome team and business at Series A regrets it, especially when the decision is based on trying to optimize for price and maturity.
The biggest problem in the industry may be at the growth stage. Private equity is a different skill set than venture capital. There are too many VC growth firms out there trying to play PE investor.
You must pick a position. Either you love to work with teams, or you love to optimize for financial performance. Not saying that VCs and PE firms don’t have to do both activities, but the focus of your efforts and your team’s DNA guides which side you fall on.
The VC industry was built on helping to create great companies and then selling those companies to PE firms (for further optimization and growth) or reaching an early IPO or strategic sale.
Being true to your strengths, not attempting to “game the system”, is in the best interest of all the stakeholders.
VCs must take a hard look in the mirror and remember that they are vendors, and their role is to serve founders and LPs with transparency and “long term patient capital” like their websites always say.
