VC’s are not as Long-Term Thinkers as They Claim to Be — Especially Seed Investors
There are two statements people generally agree with in venture capital and in investing. The problem is, they don’t agree with each other.
(1) Stick to your knitting:
Get really good at one type of investing (seed investing, series A investing, growth equity, etc) and stay focused.
(2) Buy low (when everyone is selling), sell high (when everyone is buying)
Invest in an idea while no one else likes it, and sell when everyone is into it.
The problem with pursuing #1 is that if you are a seed or series A investor, you have to invest with the hope that someone else will follow on to your deal within 12–24 months.
When VC’s invest in a business, they do so knowing the company will likely not become profitable before raising another round. And those early rounds often are enough to fund only 1–2 years of “runway.” So for the company to be able to survive, another VC will need to believe in the mission in time to pick up the torch and lead a new financing.
Often, fads don’t come and go within that amount of time so if you invest in a space, while no one else likes it, you’re going to be stuck funding the company through multiple iterations/inflection points. If your fund is not big enough, you will watch a company who’s performance metrics are great, flame out due to a lack of access to equity capital.
The nuanced goal of venture capital is to: “buy equity within 12–24 months of everyone else thinking it’s a good idea, and hope people continue to think it’s a good idea until the IPO.”
That’s a really hard game to play. The only solutions I can think of to combat this are to:
· Build a reputation such that if you think something is a good idea, everyone will follow (think Fred Wilson with bitcoin)
· Or raise a fund that can continue to fund a business through many inflection points (but LP’s generally don’t like VC’s trying to be good at multiple stages)
As of now, VC’s claim to be “long-term oriented.” But in reality, many are 18-months oriented (which is better than being focused on each quarter’s earnings, but not by much).
I think as VC firms begin raising “opportunity funds” more often they will continue to fund companies with more conviction and the confidence to continue leading investments in those businesses multiple rounds in a row.
I think the confluence of LP’s trying to keep giving more money to a concentrated handful of the best managers, and further rhetoric of “ownership drives returns” will provide tailwinds to drive this model.