If you keep your finger anywhere near the pulse of the venture capital industry, you’ve accurately sensed that the power dynamic is shifting. While venture capital firms raised a record amount of funds in 2020 amidst a global pandemic, the volume of early stage VC deals fell dramatically in the past year. As the amount of capital in the market outpaces the level of investing and startups, investors need to seriously reassess how they work with founders if they want to survive in this new landscape.
I’m a Venture Partner at Antler, a global early-stage fund, and in my former role I directed the MIT Startup Exchange. I’ve worked with thousands of startups and I’ve witnessed the paradigm shift firsthand: founders today refuse to accept terms from the investors that simply cut a check and walk away. This approach is no longer acceptable; with 12,848 registered global VC firms actively sourcing deals and $69.1 billion dollars circulating in the market, founders know there are better alternatives available and, rightly so, have higher expectations of investors as they give up early equity. Passive investment in a company’s earliest days is not conducive to success.
In recent years, I’ve watched platform VC offering suites increasingly become the norm in response to this industry shift. Josh Kopelman, known for his early investments in Uber and Square, co-founded First Round Capital in 2004 and helped to popularize this kind of hands-on approach. Kopelman worked with Uber in its infancy to help refine the company’s product and customer acquisition strategy, and at one point even provided a conference room for the Uber team to work out of when they didn’t have an office. Since then, value-add services like helping founders identify the right product-market fit, introducing startup founders to their first corporate clients, and helping fine-tune business models, have become table stakes for the most successful early-stage investors.
So how do investors build successful platforms that attract – but more importantly support – exemplary founders and teams? How can VCs best join early-stage founders in the trenches to reduce risk on their investment? First, a mentality shift is required. Venture capitalists need to start thinking of themselves less as outside investors and more as co-founders of sorts; we need to be willing to roll up our sleeves and truly work alongside our founders.
As for the actual platform support provided, there isn’t a one size fits all approach. Different funds are building platforms in different ways. Take Fifth Wall – Brad Greiwe and Brendan Wallace have built a real-estate focused fund that “pre-engineers growth” by directly connecting its portfolio companies with its limited partners, industry heavy hitters like CBRE and Equity Residential. Securing contracts with such strategic partners out of the gate immediately boosts revenue and a path to long-term adoption throughout the real estate industry.
On the other end of the spectrum, generalist fund Alpaca VC, led by Ryan Freeman and Audrey Pagano, invests in the people, products, and processes that power commerce in the physical world across industry sectors. Alpaca recently rebranded and chose the Alpaca name to signify its founder-focused approach. A collection of former founders lead the Alpaca team, and support portfolio companies with their repeatable playbook and OneHerd platform.
At Antler, we’ve seen the benefits of this platform approach firsthand – early-stage companies generally need a lot of support in the early days to be successful, and offering to them help with things like product development, go-to-market strategy and building successful founding teams can be the difference between success and failure. Startups like Marco Financial and Casting Depot have worked with us to rapidly refine their product offerings and business models. Buoyed by a team of support and advisor network, these companies have leveraged it to iterate and accelerate faster.
VCs should also consider taking a page from the playbook of corporate VCs such as Microsoft’s M12, Intel Ventures, and Qualcomm Ventures. Long thought of as “lesser” capital because it came with strings attached and from teams that were less experienced operators, they, in fact, are adding significant strategic value via portfolio development and through being lead clients. In truth, most VCs can’t match that because they don’t run large global businesses that can work closely with LPs, partners, and their ecosystem of corporate connections and advisers.
The increasing prevalence of platform VC ultimately is a win for all players in venture: investors, founders, and limited partners alike. This isn’t a zero-sum game. A deal for another investor has never seemed like a lost deal for me. I believe it’s a positive trend for the industry to move in this direction, where competition is driven by the underlying purpose of prioritizing founders.
VCs aren’t wizards – we must play an active part in the innovation happening at our portfolio companies, but ultimately we’re a small piece in a much larger equation that includes LPs and founders. The sooner we can remove the illusion that everything we touch turns to gold without a little elbow grease, the better.
For founders seeking capital, asking questions about solely check size and valuation is no longer enough; demand more of your investors. When vetting venture capital funds, ask prospective investors what kinds of additional services they provide. Ask to speak with the investor’s current portfolio companies to better understand how specifically they support their teams, even ask them to quantify the level of resources being invested. Heeding this advice will allow you to partner with a VC that will work alongside you rather than expecting you to work for them.
We live in an exciting era where founders should be kings and queens. Luckily, founder culture is peer-to-peer, so serving them looks very different from serfdom from the past.