TripleLift is the latest company in the ad-tech space to announce a liquidity moment with a “majority investment” from Vista Equity Partners understood to be $1.4 billion.
The two companies announced the agreement earlier today with the deal expected to close in the second quarter of 2021. Eric Berry will remain as CEO and will continue serving on the board of directors.
Over the weekend, I tweeted offhand about my frustration with the buzz around early stage venture rounds these days: there’s so much discussion of companies raising lots of money very quickly, when my observed reality from speaking with dozens of seed & pre-seed founders per week is the exact opposite:
This observation struck a nerve, both publicly and privately. Aside from sharing that they felt seen, lots of founders also reached out to me to ask why this is happening, so I thought I’d share some thoughts on the topic.
The notion that some founders raise money more easily than others is not a new phenomenon in and of itself. Fundamentally, if you are not able to close an investor (whether they’re an institutional fund or an individual angel investor) there is only one reason: they don’t trust you yet, and they don’t believe that you will build a venture-scale company. This is the objection that you have to overcome.
So, how do investors build trust & belief? At later stages (e.g. growth equity), investors typically have somewhat objective criteria and some amount of data to leverage such as revenue, growth rates, cohort retention, customer references, etc. They have some evidence that you have, at least in part, achieved what you had set out to achieve earlier in the life cycle of the business (though there’s probably a fair amount of voodoo and vibes at play here, too).
At the early stages (pre-seed, seed, and in some cases, Series A), I’m afraid most people will not like this answer: given the lack of data on the business itself, investors place an extremely heavy emphasis on the founder & the story they’re telling.
*deep breath*
I know this is frustrating to many people, in part because it is so subjective and unspecific. How do investors determine if they “trust” and “believe” the “founder” and the “story”?
Your mileage may vary depending on the investor, but here are my observations on what venture investors frequently prioritize in making these judgments, in order of importance:
Personal familiarity, or first-degree connections: investing in founders they already personally know through some prior experience. Maybe they backed the founder’s previous company, worked together at a previous job, or went to college together, but through something, they already have a high level of trust. (Unsurprisingly, when companies raise big rounds out of the gate, this is often the case.)
References/vouching/warm introductions, or second-degree connections: investing in founders whom someone they trust already trusts. Maybe a close co-investor at a different firm backed this founder’s previous company; or maybe the founder was an employee at a company that the investor has already backed, and the co-founder/CEO has provided a glowing recommendation (and possibly has invested in this new company themself!). Absent first-degree connection, trust by association goes a long way.
Signaling, or prestigious heuristics: This is sort of analogous to “Nobody gets fired for choosing IBM”; in venture, as far as I know, no one has gotten fired for choosing a YC, Stanford, or ex-unicorn founder.
Credibility: Failing the above, investors will seek comfort in a convincing narrative and some form of “traction”. VCs seek alignment between the founder’s story and their own upside expectations (could this be a billion dollar business?), as well as a clear articulation of the path to building such a business within existing (and future) industry dynamics (how do you get there?). In conjunction with a clear vision, investors search for early proof points, which could be undeniable user/revenue growth, referenceable customers, formal recognition of the founder as an industry leader, or more. But there’s got to be something that, in the eyes of the investor, makes this founder’s story, vision, and momentum stand out above the rest.
At the risk of beating a dead horse, I can’t help highlighting that the heavy reliance on 1-3 above is a major driving factor for the homogeneity of VC-backed startup founders, given that historically, prominent elite institutions skew demographically toward those who are white, male, and wealthy. If you’ve ever heard the saying that underrepresented founders have to be twice as good to get half as much, this is why: without the advantage of circumstantial privilege & long-standing personal relationships, undeniable performance (#4) is often their only way to get investors over the trust & belief hurdles.
(Slight aside: You might be thinking, aren’t VCs supposed to be risk-takers? And who’s to say that funding ex-Ivy League, ex-unicorn founders will even result in good returns?!? Not to defend VCs’ reliance on elitism, but this is as good a time as any for a reminder that VCs are fiduciaries managing other people’s money. They have convinced numerous people & institutions to entrust them with a pool of capital to deploy into an undetermined portfolio of high-risk companies. So at minimum, VCs generally need some amount of plausible deniability that they’re not recklessly flinging cash … even though the more we go down this rabbit hole, the less that sounds like a bad idea … )
Alas, back to reality. This is the current state of venture investing. If you are a founder who is not already buddies with tons of GPs or an obvious fit for VCs’ “pattern matching”, what do you do?
First, consider whether raising venture capital is even the right move for your business. This is a topic for an entirely separate post, but really think about whether capital is the gating factor to your business’ growth and whether acceleration is critical to the ultimate success of your business. If money is not the bottleneck and time is not of the essence, there are likely better uses of your time than fundraising.
If you are convinced that raising venture capital is the right path for your company, you will likely need to rely on self-funding and non-VC funding to get to certain milestones (the credibility piece mentioned above) before you can raise from venture funds. (How do I raise an angel round if I don’t know anyone who can write a $25k check? Great question, and a topic for another blog.)
Plan to meet people early, whether they’re angels, advisors, or VC funds, with the intention of building relationships with them over time, so that you can establish mutual trust. Mark Suster wrote about investing in “lines, not dots” a decade ago; this framework remains true today. If you do this well, over time, you end up with the coveted personal familiarity that investors value so strongly, and you will be in a strong position to then run a tight fundraising process. (For reference, at Laconia, I could not tell you offhand where most of our founders went to college, but I can confirm that we got to know most of them over 6+ months prior to writing a check. Sometimes, there are no shortcuts, and thoughtful, long-term relationship-building can be the most powerful lever to bridging network gaps.)
As you meet with investors, be sure to ask what concerns they have or what gives them pause about your company. Take each individual answer with a grain of salt, and try to spot recurring feedback to refine your pitch over time.
Fiercely protect your time and trust your instincts. In your research and early conversations, qualify investors and ensure that they are a relevant fit for your business at all based on their investment strategy, fund size, and check size. Separately, some investors, for whatever reason, will be insurmountably biased against you or your business. They may be implicitly or explicitly sexist, racist, xenophobic, otherwise discriminatory, or just flat-out allergic to the sector you’re operating in. The best thing you can do in this situation is trust your gut and waste as little time as possible with them. Your time is better spent finding the people who are real prospects for you than convincing the ones who aren’t.
But Geri, isn’t there so much more capital out there now than there was before? I keep hearing that capital is cheaper than ever, yields are low, funds are huge, and money needs a place to go, so shouldn’t it be easier to raise now?
This line of logic is conflating multiple things. Yes, there is more venture capital to be deployed, but the distribution of this capital is by no means evenly distributed. All the data I’ve seen shows that at a fund level, this capital is disproportionately concentrated in a relatively small number of very large funds, which does not bode well for founders who are raising their earliest rounds and/or not well connected within the relatively insular ecosystem benefiting most from this boon. The fact that an “in network” founder who could easily raise $1M pre-product ten years ago could probably raise $10M pre-product now thanks to the influx of new capital does not necessarily mean that an “out of network” founder who struggled to raise $500K ten years ago would have any easier of a time now. If anything, the widening of the barbell makes it even harder, as “in network” competitors consolidate war chests faster than ever before. This acceleration does not mean the first-movers will ultimately win, but it can certainly make underdogs’ early fundraising efforts harder in the meantime.
Of course, there is only so much that founders can do to overcome these structural barriers. I recognize that many investors, especially those writing bigger checks, do not necessarily have a goal of identifying opportunities that don’t fit the typical mold at the earlier stages, rather than “chasing hot deals”. But for those who do have this goal, the onus is on us to change our processes:
Prioritize proactively meeting founders outside of our immediate networks. At Laconia, we evaluate all cold inbound pitches and have been doing open office hours every week for 3+ years, through which we’ve met hundreds of founders whom we’d likely never have encountered otherwise; 10/10 recommend this, I hear it’s even trendy now!
Push for more objective decision-making/benchmarking. Are you applying your investment criteria uniformly? Are you evaluating founders from different backgrounds in comparable ways, while still being mindful of potential differences in context and culture?
The early stage venture industry needs more people, with more diverse backgrounds, to play a role in spotting and supporting true outliers. How can we create more seats at the table beyond the constraints of traditional VC job structures, which are limited in both number and scope?
Ultimately, the data will show if we’re making any meaningful progress. If 2020 was any indication, in times of uncertainty, VCs double down on their existing networks rather than expanding their reach (e.g. here and here). We have 9 months left in 2021 to move forward instead.
If you’re still with me, thanks for reading! As always, I’m at geri@laconia.vc and geri_kirilova on the dreaded bird site.
Keith Herman interviews Dan Pantelo, Founder & CEO of Marpipe. Dan gives the backstory of Marpipe and speaks candidly about his entrepreneurial journey. Equally important, he talks about his own character traits and early days that lay the foundation for this current adventure.
Last week I shared some thoughts on the parts of venture capital that don’t make sense, specifically regarding the structural barriers to investing in the asset class, both as a GP and as an LP. This week I want to dive into the oddities of another element of this industry: the venture capital job market.
Over the past few years, I have formally and informally mentored dozens of aspiring VCs, seeing a fairly close view of the dysfunctions of this labor market.
Let’s start with the exploration phase. In conversations with people who have come across VC as a potential career path, the first question I usually ask is, “What is it about venture capital that has piqued your interest?” Very often, I find that the answers reveal a misconception of what venture investors actually do (e.g. “I love launching new products”) and instead suggest that the seeker would enjoy a different role (e.g. joining an early stage startup) much more than they’d like being an investor. This leads me to the first bizarre realization: it feels like every other person I meet wants to be a VC, but very few seem to know what a VC actually does.
One of the most frequently asked questions is, “What is the day-to-day role of a venture investor?” Frustrating as it may be, the answer is, obviously, “It depends”. It depends, mostly, on fund size, stage focus, and role type. Generally, the larger the fund, the more specialized the role; the later the stage, the more quantitative the analysis; and the more senior the role, the more strategic the work. Of course, there are exceptions and hybrids, but generally, investor roles vary vastly from one another, and finding the right fit for your personal interests is very much a needle-in-a-haystack situation.
Let’s say you formulate a general idea of what you’re looking for and begin your job search in earnest. For junior- to mid-level roles (typically analyst, associate, and principal roles), if the job openings are even shared publicly, you will likely encounter a mix of somewhat arbitrary and/or elitist prerequisites:
“Top-tier university degree required” (yes, everyone else is chopped liver; sorry, I don’t make the rules)
“Background in management consulting or investment banking”
“Attention to detail a must”
“Pre-MBA only” (the most bizarre and offensive shifting of goalposts, in my opinion)
In many cases, the application process will require you to draft sample memos, share investment theses/analyses of trends, build financial models, provide your thoughts on the fund’s existing portfolio companies, and curate lists of interesting startups (often explicitly aligned with the specific funds’ investment areas — how convenient for them!). It is not unusual for these processes to take you 20-40 hours a week.
The reality is that after months (or, in some cases, years) of these interviews, most candidates inevitably fail to land a role, often for little reason beyond the fact that there are simply hundreds of applicants vying for a single position. While disappointing, this is expected.
What’s less intuitive is the fate of those who do end up in the coveted venture roles. Given the amount of time spent on vetting, interviewing, and testing candidates, you would think that this process is the firm’s beginning of a long-term investment in a future partner. In rare cases of partner-track (or partner-potential) roles, this is indeed the case; but in many, it could not be further from the truth. Whether it’s disclosed at the beginning of the application process or discovered later on, most junior- to mid-level venture positions are rotational, with the expectation that any hires will move on from the firm within 2-3 years. Yes, all of this time and effort, to find yourself in a dead-end role.
This brings us to another somewhat underappreciated reality of venture roles: every position is either discretionary or non-discretionary in nature. In discretionary roles, you are being hired for your judgment. You are hired to leverage your unique point of view to source, choose, and help companies. In contrast, non-discretionary roles are, in a nutshell, support roles: you are there to source leads, build models, conduct due diligence, write investment memos, and “learn the craft of venture investing”. You are then, in most cases, expected to seek a discretionary role elsewhere, either by joining another fund at a more senior level or starting your own. You can (and most firms likely would) make the case that many venture roles are “a mix of both”, but let’s call a spade a spade: if a job description prioritizes attention to detail, working under tight deadlines, and having spent time at a top tier consultancy or investment bank, the firm is optimizing for a killer analyst more than it’s searching for its next visionary leader to identify outlier investments.
As venture’s popularity has increased, a whole sub-industry dedicated to helping people “break in” has emerged: blogs, webinars, resource guides, Slack communities, paid bootcamp programs, and more. And while these resources often provide excellent information, diving into the specifics of articulating investment theses, sourcing companies, networking, and preparing for interviews, they don’t actually solve for the extremely lopsided nature of this labor market, in which the demand of candidates outpaces the supply of jobs by multiple orders of magnitude. Once all of these candidates become experts at navigating this job search, where will they go?
To firms with arduous and, frankly, exploitative hiring processes, particularly for mostly non-discretionary roles: is all of this really necessary? Is there evidence that asking candidates to spend so much time on your interview processes correlates to strong performance in the role, especially one that is short-term in nature and limited in scope? And especially for those who consider these roles at least partially discretionary, have you considered that your onerous interview requirements may be perpetuating the homogeneity of the industry by boxing out candidates who do not have the luxury to dedicate dozens of hours of unpaid labor to your interview process, ultimately depriving you of hiring those with not only differentiated backgrounds but also the highest investment potential?
To candidates agreeing to these hiring requirements: why? Let’s say you get the job. Congrats! Your two years fly by. Now what? What were you hoping to gain? What are you now hoping to do?
If the answer is that this whole circus is a necessary stepping stone to a discretionary role, then as an industry, we have to face the reality that these job practices are yet another form of structural gatekeeping and a failure of our collective imagination. The venture industry desperately needs more people, from varied backgrounds, with different paths to bring fresh perspectives and fund truly world-changing companies. And building new structures that get us closer to that potential has to start with a hard look at the things that are simply not working about our current systems.
With the evolution of syndicates, equity crowdfunding, rolling funds, and more, the opportunities for individuals to learn and build personal track records outside traditional structures are becoming clearer. We simply can’t keep doing the same things and expecting different outcomes. If you are working on alternative venture investing pathways, please share ideas and stay tuned. As always, feel free to reach out directly (@geri_kirilova on Twitter or geri@laconia.vc via email).
A few months ago, Leah Fessler published an excellent blog on things that don’t make sense about venture capital. It inspired me to finally jot down some of my own thoughts on a few of the absurdities of this asset class that I’ve been grappling with for years. Frankly, I have a very long list, starting with the structural barriers to venture investing.
Let’s start with the VC GP perspective. If you are a new GP trying to raise a modest $20 million fund for seed/pre-seed investments, especially for a first-time fund, you will most likely find that the conventional paths to raising such a fund are not as straightforward as they appear. Assuming you do not have an anchor LP who’s open to committing a meaningful chunk of the capital for the fund, you will likely try to raise from either institutions or high net worth individuals.
So you start with institutions. You quickly find out that the majority of institutional LPs (pensions, endowments, foundations, large fund-of-funds, etc.) write minimum checks of $5M - $50M and typically have concentration criteria that preclude them from funding more than 10% of the total fund size. Womp womp. Non-starter for your $20M fund.
Next up: high net worth individuals. You might think, alright, $20 million is a speck of dust within the broader asset management industry, surely I can convince 200-300 people to write checks of $50,000 - $100,000!
Sadly, out of luck again. The driving constraints have way too many caveats and nuances to fit into this blog (I recommend Chris Harvey’s explanation here if you really want to nerd out), but the bottom line is, you most likely won’t be able to accept investments from more than 99 LPs per fund as per regulatory limitations without some major structural gymnastics.
So … you can’t access the trillions of dollars of institutional capital that are allegedly being invested into venture, and you can’t raise from the long tail of high-earning/“rich but not THAT rich” investors. You somehow need to raise $20 million with checks averaging $200,000. For reference, anyone rationally writing a $200,000 check into a single venture fund likely has a net worth of over $10 million. And you need to close 99 of these? 😳
Next time you hear someone bemoaning the lack of diversity in venture and startups, think about these realities:
At risk of stating the obvious, the barrier to entry for new GPs, especially those without prior “top tier venture” experience, is nearly insurmountable and heavily skewed toward those who are already wealthy or have close personal proximity to wealth.
The barrier to entry for LPs who are interested in writing checks into venture funds is similarly high. Even people who are willing to make six-figure investments into risky, highly illiquid assets in order to fund innovation are likely to learn that their money is not good here. This barrier not only limits wealth creation but also sustains the homogeneity of decision-makers and influencers within the venture ecosystem, starting at the top of the capital stack.
Before we break out the world’s tiniest violin for all the aggrieved VC GPs and LPs, let’s talk about the biggest loss incurred: the perpetual dearth of capital dedicated to pre-seed/seed-stage companies. Over time, the few funds that manage to get off the ground & see early signs of success with a micro fund focused on seed investing almost invariably expand into significantly larger fund sizes (and, all too often, larger investment round sizes) in order to access & deploy an institutional capital base. And the earliest stage founders seeking a few hundred grand to a few million dollars? They remain chronically underserved.
Given these realities, here are the things that still don’t make sense to me: Why are most institutions unwilling to allocate meaningful amounts of capital into the segment with the highest potential return within the venture asset class? And perhaps more importantly, why does one of the riskiest asset classes (early stage venture capital) largely contort itself to the constraints & incentives of more inherently -- and rightfully so -- risk-averse capital allocators (large institutions, family offices & ultra-high net worth individuals, who are largely optimizing for wealth preservation rather than wealth creation), instead of creating new structures that foster more accessibility and alignment in GP/LP return expectations?
Thankfully, we are seeing more bottoms-up interest and pressure to drive structural changes than ever before. If anything in this post resonates with you and/or you’re interested in collaborating with us on solutions to these systemic absurdities, please reach out directly: @geri_kirilova on Twitter or geri@laconia.vc via email.