Why venture capital is changing radically
Entrepreneurship is in a new moment, with a new set of circumstances and pressures, and a new collective cadre of players. Success in venture capital going forward will become less about chasing momentum and more about embracing collaboration. This is no small mindset shift. It’s an evolutionary imperative.
The successful founders of tomorrow simply won’t look like the ones who came before them, and they certainly won’t look like today’s venture capitalists. Surviving in the new venture landscape requires us to finally step away from the dated pattern-matching model and do something truly disruptive: Invest in the rising competition. It may seem counterintuitive, but it’s what this moment requires.
As we set resolutions, intentions, and objectives in the first quarter of 2022, our central theme has to be adaptability.
The center did not hold
We emerged from 2021 with a fundamentally different venture landscape at the seed stage. This shift is a confluence of many factors. Valuations have skyrocketed, with median early-stage valuations doubling from $25 million to $50 million over just the past 3 years. Big players in venture capital, like Andreessen Horowitz and Greylock Partners, have formalized their interest in the seed stages by allocating huge dedicated sums to the earliest rounds ($400 million and $500 million, respectively). But of all the trends that brought about this sea change, none will alter the course of the venture industry more than this one: a record numbers of micro-funds (that is, funds under $50 million) closed last year. According to Pitchbook, 240 new micro-funds had already been raised by the time it published its Q3 US VC Valuations report last year.
With these funds, the center of gravity—particularly at the seed stage, where we focus at Fuel Capital—has shifted from traditional firms to a highly distributed array of managers, angels, and funds. These new arrivals take many shapes. Among the players: former (and current) founders and operators with experience in the trenches (like two-time founder Caterina Fake and ex-Yahoo CEO and current Sunshine CEO Marissa Mayer), celebrities and influencers who bring marketing power (from Gwyneth and Ashton to athletes, ranging from Skylar Diggins-Smith to Kevin Love and Chris Paul), and every other stripe of nonconforming investor. It’s an understatement to say that there’s a lot of energy at the seed stage right now.
These emerging VCs are touching industries, meeting founders, and seeing the potential deals that will change our world. And they aren’t doing it from Sand Hill Road.
The age of the emerging manager is upon us
Our new peers at the seed stage are bringing things to the table that this industry desperately needs. Fresh perspective. Fresh skills and experiences. Fresh networks. Fresh distribution channels. They’re also leaving behind the biases that no longer serve founders. With less ego and identity tied to being a VC, they’re free to approach deals with more openness, objectivity, and willingness to engage. The founders that shape tomorrow are going to be aligned with the fund managers who started yesterday. And frankly, this new guard is likely seeing more promising, more exciting deals earlier than the old guard, leading to an increase in pace and deal flow for the entire sector.
Today’s founders are becoming more intentional with the way they think about ownership.
The founder in me can’t help but look at this big, diverse group of new investors and see a real opportunity. New fund managers face massive friction as they spin up their operations, court-limited partners, and try to secure deal flow at the later stages. Any fellow founder will recognize the above as a list of pain points. Problems to be solved. Opportunities for disruption.
Put simply, emerging managers are the new founders, disrupting the venture space. At its core, venture has always been a service business. We put resources into building up founders, expanding their capacities and skill sets, and shouldering burdensome pieces of the business, such as recruitment, legal, back-office admin, and PR. In the new landscape of venture, truly serving founders requires us to make similar investments in the emerging fund managers themselves to ensure their success. This is the primary adaptation we must make to survive in our new environment.
Later stages can benefit from that energy
With a lot of energy at the seed stage and a lot of legacies at the later stages, founders also need these emerging managers to have the depth to stay by their sides for the long haul. It’s not enough to simply help new funds get off the ground so they can focus on investing in early rounds. As our founders move through later-stage deals, it’s necessary to make room for the continuity and support provided by those fund managers who have backed them from the very beginning.
Instead of simply continuing to work with the investors they trust, founders all too often must bring new investors into the fold as they scale. Many of these investors are introduced through SPVs (special purpose vehicles), a model that’s administratively prohibitive for general partners and often bad for founders, who typically would prefer to move more quickly and share less information. This begs the question: How can we make it possible for less-resourced funds to partner with their companies from seed through success?
Founders are rethinking their cap tables
Today’s founders are becoming more intentional with the way they think about ownership. They’re finding real value in having people who can empathize with the ups and downs of being a founder involved from the very beginning. They’ve come to appreciate the power of having a cap table that contains diverse perspectives. The emerging class of VCs are a welcome addition to those at the helm of today’s up-and-coming companies because they bring practical, real world, and operational advice to the table.
The venture industry needs this new blood. Emerging managers with diverse backgrounds and experiences provide unique value to companies. They’re fortifying and advantaging founders in ways the traditional VC class cannot—specifically, by bringing in different skills, perspectives, and backgrounds. These insights and the empathy that accompanies them will help founders get ahead.
This adaptation is a force multiplier
To evolve as an industry, more established VCs must make similar kinds of investments in their new competitors as we do in our founders today. It may seem counterintuitive to invest heavily in the rising competition, but this necessary adaptation is a force multiplier. By providing operational resources, sharing expertise and connections, and, yes, even helping these new managers access additional capital and expand to later stage deals, we truly double down on building a higher impact venture community. It’s not just an adaptation that will help VCs thrive in our new environment—but it could change the face of entrepreneurship itself.
Leah Solivan is the founder of TaskRabbit and the general partner at Fuel Capital.
