Power in the Valley
Venture capital has lost its defensibility
There are days where I can’t stop thinking about Rasputin.
This is the sort of uncomfortable habit that is hard to justify and marks me out as a genuine oddball. It is no less true. At a now-empty, somewhat cavernous Brooklyn Roasting coffee shop, I will find my mind drifting towards the shaggy holy man’s penetrating gaze, wondering what he would be like to meet. On long walks, or falling asleep, he will appear for a moment, almost in passing, part of the furniture.
We all have these parts of our minds, I think, resting places visited when we do not realize we are thinking. We alight on a favorite sports team, an old restaurant and its signature plate, a holiday, a book, a smile of someone loved, a patch of sunlight on the sea. Dozens, maybe hundreds of moments and half-moments and feelings united only by their familiarity, by the feeling we get when we realize we have stumbled back. Oh, right, it’s this, again.
I have those other things: I like to think about my childhood team, Chelsea Football Club, the movie La Grande Bellezza, Venice, Cartagena, a trip to the Greek island of Hydra, the ontology of sandwiches from the Autobiography of Red.
But I also have Rasputin and his hollow eyes and lank frame, and again, today, I find I am having one of those days.
It’s a fascination that has to do with power and its source.
Theories of power
“Power is a word the meaning of which we do not understand,” Tolstoy wrote in War and Peace.
Much time and ink have been spent trying to derive its substance and source. Definitionally, anything ineffable cannot be explained in tangible terms — I do not believe a feeling is ever perfectly captured in words, though there is value in trying. So, when defining power, we are open to pick whatever reasonable framework we find most appealing.
I choose French and Raven. In 1959, the pair published “The Bases of Social Power,” which identified five sources of influence. They later added a sixth.
Coercive power forces compliance. It is the power of the stick, the blade, the gun, though it can be emotional as easily as physical. No hearts and minds are won in the process, but a stated aim is achieved through duress.
Reward power pays for compliance. Bonuses and salaries speak this language, as do praise and awards. Castigation or fines, essentially “reverse-rewards,” do too.
Legitimate power governs by social norms. Particular roles are considered to hold power by society. Someone in such a position wields power based on this perception. Royalty, politicians, and executives all have legitimate power, leveraging their position within a hierarchy to manipulate outcomes.
Expert power rules through experience. Individuals that have developed specific expertise — or the appearance of it — garner trust through that knowledge. We see a stethoscope and a white jacket and assume the doctor will know how to address our cold.
Informational power compels through proprietary access. Rather than relying on information gained through experience like expert power, informational power depends on the information itself. The access to this information, the recipient, and its potential use are all critical. A series of Swiss bank account numbers would be no use to me; someone who offered them would possess little power over me. But were I nefarious (and more technically gifted) individual, such an offer would be persuasive.
Referent power rules by character. Some people, a luminous few, are powerful simply because that’s the way they are. Their manner of speech and expression — their charisma — convince, alone. This is the “reality distortion field” of Steve Jobs, among others. Whatever one thinks of the man, Bill Clinton was a master of referent power, displayed in this 1992 townhall. While Bush — possessor of much greater legitimate power as the incumbent — checks his watch, dithers through an argument, and finishes with a boilerplate cri de coeur, Clinton listens intently, speaks from experience, narrows the space with his eye contact. It’s a four-minute testament to the power of personality.
Rasputin and referent power
Perhaps more than anyone in modern history, Rasputin leveraged referent power to his advantage. He didn’t rely on titles, or money, or an army’s might to control, but his sheer magnetism.
How else can you explain the rise of an illiterate Siberian peasant to the Russian court?
While expert power played a role — he convinced the Czarina he could cure her son’s hemophilia — above all, Rasputin conquered with charisma. Amidst rumors of manic orgies, he won over prim church officials. In stuffy St. Petersburg parlors, a dark, wolf-like figure charmed with “stranger manners.”
In recounting a meeting with the poet Ted Hughes, writer Erica Jong mentions his bludgeoning, inescapable appeal.
You could inhale the man’s pheromones across the table — this stink of masculinity and musk that must have worked on countless girls. His eyes held you in his gaze as if you were the only person on the planet.
Another admirer was said to have found Hughes so mesmerizing, so alluring she was forced to run to the toilet to vomit with desire.
Was this what it was like to meet Rasputin? To find one’s self undone with love, admiration, despite better judgment?
Just as it seems to have been what made him powerful, his gifts of personality also made Rasputin vulnerable. This is an interesting quirk of referent power — there’s only one way to truly strip it from someone. A battalion can be vanquished, money can be stolen, kings can be dethroned or disgraced, information can be revealed. But how can you make someone less themselves? Only expert and referent power reside in the body.
By 1916, Rasputin’s influence had reached a dangerous pitch. A member of the Duma, Russia’s parliament, decried his meddling, noting the transformation of the Czar’s ministers into puppets:
[They’ve] been turned into marionettes, marionettes whose threads have been taken firmly in hand by Rasputin and the Empress Alexandra Fyodorovna — the evil genius of Russia and the Tsarina…who has remained a German on the Russian throne and alien to the country and its people.
A month later, Rasputin’s referent power was neutralized with a cellar’s worth of cyanide and three bullets.
Venture capital is not a field associated with charisma, with the referent power of Rasputin.
What comes to mind first?
Perhaps a Patagonia vest, a pair of Allbirds. A smug grin, a slick-haired shark, back-patting and piggy-backing. In short, a banker — just one that goes to Burning Man.
That might be changing. While investors could once rely on the reward power of all gate-keepers, increased competition in the asset class has forced VCs to try and draw from other power sources. Looking ahead, investors with referent power may prove best-positioned.
A flooded Valley
In 2008, venture capitalists invested $53B into startups. A decade later, that number swelled to $160B, dipping slightly in 2019. The number of startups rose, too, though not in proportion. In 2018, 8.4K companies received funding globally, more than double 2008.
The expansion of venture capital as an asset class has had profound implications and altered power dynamics.
Firstly, more money and comparatively fewer startups have caused an escalation of competition. Ten years ago, a founder had comparatively few funds from which to raise. In that context, VCs held reward power — if you wanted to grow your company, you had to accept their capital and terms.
Today, that dynamic has changed. There is a superabundance of funds, particularly at the early stages, while big funds have grown bigger. Both developments have resulted in power shifting towards entrepreneurs. This is not universally true, of course — many remain locked out of Silicon Valley — but is observable in aggregate.
The clearest signs of this change are the increase in startup valuations and the proliferation of portfolio services. In the face of increased competition, VCs are forced to bid up the price, or provide unique “value-adds.” The latter are increasingly rare. In 2009, Andreessen Horowitz upended the industry by offering their portfolio the use of an expansive platform team, able to help with branding, marketing, FP&A, and just about anything else. Since then, other firms have caught up. The result is a class of look-a-like funds, searching for differentiation. Searching for new power.
In this pursuit, VC is reconfiguring its use of French and Raven’s six bases.
Barring blackmail or a controlling interest, venture capitalists have never held coercive power. They cannot force you to take their money. (Note to self: gather kompromat on Patrick Collison before IPO).*
Reward power has all but disappeared or became a dangerous game. Beyond a better valuation or more money, what unique prize can funds offer?
Legitimate power may still exist for a few brand-name firms. Receiving a termsheet from one of Sequoia’s partners may still mean something. But beyond a small group, funds are too new, too unremarkable, to hold legitimate power.
What does that leave us with? Expert, informational, and referent power.
The former two have proven valuable in the current market. If you’re planning to build a marketplace, FJ Labs possess expert power (and maybe informational power), as does Forerunner for CPG, and Schematic Ventures for supply-chain. Leveraging software, firms like Signalfire hold informational power. If you want access to their proprietary talent sourcing tool, you have to take their money.
Do these advantages accumulate or diminish in a growing market? Arguably both. Specialist firms will deepen their expertise by working with companies in their chosen sector. The proprietary signals offered by data-driven firms should be more valuable when there is more noise through which to parse.
But the growth of the asset class also brings more direct competition. Once, it may have been enough to be the “marketplace guy” or the “SaaS gal.” Today, there may be a hundred investors with equivalent experience, all attempting to use expert power to their advantage. Informational advantages, though perhaps harder to disrupt can also be eroded. If SignalFire’s talent sourcing meaningfully increases the firm’s power — as it seems to have done — won’t others follow suit? Any firm with sufficiently deep pockets should be able to create something equivalent or that appears equivalent.
And so we turn to referent power. The most ineffable form of influence may also be the most defensible. That truth may usher in a new type of venture capitalist.
VC as Empathy Athletes
What will make a great investor over the next ten years?
Rather than recruiting from investment banks, consulting firms, and big tech rotational programs, we may see venture firms turn to those with softer skills. Those with the ability to listen not only closely, but with care and respect. To not only understand, but empathize.
Most investors will tout their credentials on these fronts, but few truly excel. That may be a matter of training as much as anything — we do not learn humanity at a trading desk.
The importance of EQ in the industry has risen to the fore over the last week or two. VC Guide, an anonymous review site that lets founders rate investors out of ten, has garnered attention.
As an aside, it should be said that VC Guide suffers from the same ailments of all anonymous review sites. There are some useful issues raised. But by and large, rage and adulation duel. Disinhibited posters pan investors for arriving late, presenting as low energy, or asking insufficiently perspicacious questions. These condemnations are mixed with encomiums as manicured as press releases. (It is also a demonstration of founder power — reverse the parties and imagine the maelstrom.)
More relevantly, it’s a testament to referent power. To the importance of a pleasant personality. Most complaints, both positive and negative, refer to an individual’s character. The damned are described as “very terse,” “difficult,” or constructively, as “pompous c*nt[s].” The praised are “approachable,” “warm,” and “caring.”
For a long time, VC had such a compelling product (money), service was an afterthought. Now, it is everything.
What does this mean? What changes as a result?
Different models may emerge. Investors will need to be not only mentally strong but athletic in their empathy. They will need to charm, at scale, without the smarminess that usually entails. Content, including social media, podcasting, video, will be seen not as a waste of time, but essential to building and exercising referent power. Rather than recruiting from the financial sector, we may see firms hire from customer service, enterprise sales, and community management.
Finding high EQ and high mental acuity in a single package is rare, perhaps resulting in some firms adopting a Cyrano approach. A brilliant, research-led “picker” could direct a genial frontman towards a target, tasking them with winning the deal.
Whatever the configuration, the capital class will need to find its compassion.
“No one cares how much you know until they know how much you care.”
Those words come from Teddy Roosevelt. Though more readily associated with toughness than warmth, it’s an indication of the importance of referent power, even to someone able to leverage French and Raven’s other bases.
Venture capital is half-way through a transformation. Power dynamics are changing in the Valley. As capital is commoditized, institutions lose appeal, expertise is more common, and informational edges are copied, real power will lie with masters of referent power. Those able to persuade by the sheer force of their personality — to compel as Rasputin once did — may prove the difference in winning competitive deals. The future belongs not only to those that understand markets, but those that understand people.
*This was a joke. Be nice to the Collisons.