I asked some investor friends to share, as the title suggests, one thing they wished people better understood about venture capital. There were no ground rules other than to specify that ‘people’ could be founders, politicians, LPs, etc and that it would be default attributed but anonymous if they desired. Reporting out in batches of five. Here’s Part IV:

Here’s something I only realized about VC once I joined Matrix: more or less everything we do as investors is implicitly an invitation to reach out. To trace the line of thought to its source: I can only invest in a founder I meet, and I can only meet a founder I know about, so I spend a lot of my time reaching out to founders and probable future founders—but that still only scratches the surface. So whenever I have a spare minute, I try to post something to the world wide web that might possibly entice an unknown founder or future founder to track down my email address and send me a note. It’s a lossy approach, but it’s also the only way I know to cast a wide enough net.

In my previous life as a PM at startups, I squinted at the vast volume of VC internet activity from a distance and assumed it was a mix of self-expression and broad “brand-building.” What I can say now from personal experience is that all the frenetic posting is actually getting at something much more specific: it’s us angling for a “same here!” or “I was thinking more about what you posted…” or “funny you should mention that, we just started building” note from out of the blue—especially from people who are too conscientious to “impose” without a timely premise. (By the way, it’s never an imposition when you reach out; keeping an open inbox and an open mind is a lot of the job in VC.) So the next time you see one of us post, just know that we’re waiting for you. [Diana Kimball Berlin/Matrix]

[Hunter: So I agree with Diana – of course it’s prospecting, and for most investors, it’s genuine interest and curiosity driving their efforts in this area (besides the fact it’s essentially our job). BUT I’m also a believer that most founders shouldn’t waste time with extensive investor conversations unless they’re getting ready to raise capital within the next 3-6 months -or- you believe an investor can help you in some specific way separate from/ahead of a funding.]

I wish more people understood that venture is a people business first and foremost. Building anything of value, whether a company or a fund, takes a village. At BTV, we believe the most important thing is having the right people around you, and the right relationships, to build each other up and push each other  forward. Relationships between VCs and founders, as well as between VCs and their LPs, last a long time. And the best relationships follow you through your entire career.

So the transactional behavior that shows up in our industry – founders creating FOMO to force investors to make decisions within days, VCs being cheerleaders when things are good but disappearing when things hit a snag, etc, are all counterproductive. If you take the time to build the right relationships with the right partners, we’re all here to lift each other up. [Jake Gibson/Better Tomorrow Ventures]

[Hunter: It’s a relationship business that’s built on transactions – isn’t that the ironic rub? It smarts when an investor or founder with whom you think you’ve built a great relationship doesn’t include you in something. While it’s often not personal, and each opportunity has its own context, it does mean that you didn’t do you job.]

One key point I’d like to highlight is that venture scale doesn’t always mean technology startup. There’s a saying, “the riches are in the niches,” and I believe this holds true — especially outside of pure technology plays. A common misconception is that building a tech company automatically warrants venture capital, and vice versa. Over the years, these ideas have merged, but in reality, we’re often looking for deals on the edge—those outliers with big upsides. These businesses might not make immediate sense on the surface.

We tend to invest in unconventional people, ideas, and markets. While this is generally true, the core is about companies that can take a small amount of capital, grow exponentially, and ultimately create significant value, potentially returning a fund multiple times over. Find an investor who believes in *you*, as a founder, building this outcome and you’ve found a fit. [Jesse Middleton/Flybridge]

[Hunter: One thing I’ve been talking about with Satya is some days I feel like there are cohorts of 2024 founders who are (a) ‘better’ than 2019 founders [in terms of experience, know how,] but (b) solving less valuable problems than 2019 founders [because in certain categories we might be in-between innovation/value creation cycles]. Do you bet those founders can figure it out (and that we’re wrong about the ‘value’ of the problem), or does market always beat founder?]

Early stage rounds today are, in many ways, more a function of capital supply dynamics than actual company value creation

There are, in any vintage of startups, finite opportunities that can create the outcomes required for institutional venture capital—it is an asset class with meaningfully diminishing returns as it scales. While some of the euphoria of 2021 is gone, we’re still in a moment where oversupply of capital is perverting some early stage market dynamics. At the moment, funds are deploying historically large war chests at this finite group of opportunities with hopes to be part of these few large outcomes. This dynamic gets exacerbated as you get earlier in company life cycles where the quantum of capital for the large allocators becomes less meaningful and before actual metrics and multiples converge to larger (e..g. public) markets.

For now, this has created a binary moment of haves and have nots. There are “hot” consensus companies that have significant demand for their rounds (much of which is preemptive vs. normal milestones) and meanwhile the unspoken truth is that the vast majority of the ecosystem is manufacturing rounds or struggling to raise. In a world where GPs are experiencing similar binary dynamics, with many funds being culled in the process of LPs potentially rotating out of the asset class, cost of capital will rise and the “have nots” in the early stage market may signal a new normal. [Adam Nelson/FirstMark Capital]

[Hunter: Oh my goodness, yes. I’ve got a blog post teed up mentally about why seed rounds are what they are. Maybe I’ll still write it but I agree with Adam here.]

We all know that VC is a Power Law business. A single exceptional investment can return multiples of a fund, make up for every other investment being a loss, and render modest returns (e.g. 2-5X multiples on investment) quite meaningless.

But not every VC firm and individual VC is primarily incentivized by the Power Law. Firms with very large funds make a lot of money for themselves in management fees before realizing returns. Individuals get promoted for successfully out-competing other investors and winning over founders long before knowing whether those were great investments to make. Those incentives are often misaligned with the interests of founders and limited partners. 

So next time you’re assessing a VC as a potential investor in your company, or considering investing in their fund, do your diligence on their structure and incentives. It will govern their behavior as you determine whether or not to partner, and for the years to come thereafter. [Nikhil Basu Trivedi/Footwork]

[Hunter: Power Laws was mentioned twice in Part III of this series – you can see how fundamental they are to our business! Here NBT does make a note that it matters (a) how big the outcome needs to be based on fund size and (b) what the dynamics of a GP’s incentives are in how they think about what ‘success’ looks like.]

Part I: Andre Charoo, Bill Clerico, Ryan Hoover, Amy Saper, and Dan Teran.

Part II: Victor Echevarria, Chris Neumann, Micah Rosenbloom, Alexa von Tobel and Roseanne Wincek.

Part III: Maya Bakhai, Paris Heymann, Nakul Mandan, Eric Tarczynski, and ANONYMOUS

Part V coming soon….