In the new VC normal, builders will win

Although it may be a tough pill for some investors, we’ll never go back to the days when VCs could win by being the only term sheet on the table – the industry raised too much capital for that to happen, even for the most exceptional startups.

As venture capitalists continue to financialize as the hedge fund and private equity industries have done over the past few decades, venture capitalists must win with informational advantage or by establishing the relationship of power and founder to beat their competitors head-on.

Offering startups more money at higher prices was recently a popular way to get allocations in desirable ventures, but it was often questionable whether such decisions were backed by rigorous and compelling data.

Either way, there are indeed legitimate, hard-earned information asymmetries that lead to unique access to deals: exceptionally intimate founder relationships, superior sourcing processes, the ability to synthesize theses lucid, etc.

There are also ways to win in purely competitive scenarios where VCs have material information that their peers don’t, but I wouldn’t bet that the vast majority of companies would get much more than marginal allocation left behind by a16z, Sequoia and other big, sophisticated companies.

Either way, it seems clear that the winners in venture capital over the next decade will be the full companies that continue to financialize the industry and the smaller companies that successfully leverage specific networks or knowledge bases. Looking in depth at each founder’s vision and initiative is the only way to go.

So how are companies moving towards this?

Collecting the flow of transactions: it takes a whole village

Sequoia innovated with its scout program years ago. Looking back, it seems obvious that hip operators tend to get the first glimpse of founders embarking on building a business. But at the time, this deal-flow strategy was rather unique.

Nowadays, as most companies have copied or considered copying the structure of the scout program, the transaction flow becomes more commoditized. We are nearing the limit of what companies can offer scouts in terms of porting or verification sizes. Loyalty is limited and deal flow often spreads quickly anyway.

The advantage is no longer in the concept of a scouting program, but rather in new ways to find more deal flow than an internal team could ever find on their own.

AngelList has done a great job with Rollup Vehicles (anyone can be an Angel), SPVs (anyone can be a GP) and Funds/Subscriptions (anyone can be an LP). The data collected by owning this infrastructure is almost unparalleled, and enabling this feature makes a difference for those who use it.

Firms that consistently write small LP checks to emerging managers have also done a great job of “buying” the large-scale deal flow. For example, a16z systematically evaluates the investments made by the angel, “micro” and seed funds they support. What a great way to get a scoop on the next cycles before any formal process is handled by the founders!

These examples represent two extremes: tools like AngelList “arm the masses” of the tech world, while a16z’s strategy works well for those with billions to invest.

I expect companies to be very intentional and experimental in finding new ways to organize external supply networks with new incentive structures.

Network Analysis: Think Smarter, Not Just Bigger