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The Renegades of Venture Capital

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Originally published on Substack — March 31st, 2022

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Defining The Renegades

I've been working in venture for just over seven years. I've loved it. I love working with founders and thinking about how companies get built. I've never considered myself the very best at anything. But what I am is observant. And when you're observant the thing you hate the most is inconsistency. Venture capital is inconsistent.

There are some people who hate VCs and think the whole system is bunk. I'm not in that camp. But there are also some people that think venture has been a cottage industry for decades with a lot of participants who believe themselves to be the protectors and deliverers of innovation while sitting on one of the most under-innovated models that exists. I am in that camp.

I started thinking about the changing venture landscape several months ago when I would talk to other VCs at well-established firms and get the sense that we sounded exactly the same. Charlie Munger said "don't sell something you wouldn't buy." And I started to step back and really evaluate what we, as VCs, are selling.

My first observation was the unbundling happening in venture as the power of monolithic VC brands started giving way to more powerful influence of individuals.

"People who know the value of their own brand and reputation. They recognize the fundamental disruption going on in venture and are leaning into the opportunity it creates."

The second observation was around the productization of venture. Very few investors could give an answer to the question "what is your unique differentiated offering to founders?"

"Sometimes when a founder goes looking for a venture fund to work with it can feel like candle shopping. Some candle aficionados will tell you they're all unique in their special way. But the average person knows the options are mostly just wax, food coloring, and different flavors of axe body spray."

And third, I thought through the implications of how VCs think about talent, both internally and externally. And why they may not always be very good at recognizing it.

"That doesn't mean that VCs are incapable of recognizing potential. They still have to try and do it a lot. But when you have a limited pool of frameworks for what "good" looks like, an over-trusted gut, and a tendency to use numbers as a crutch? You're not going to be at your very best."

In my piece on unbundling venture I referred to these individuals leaning into their own brands as "renegades." But as I've spent more time exploring the changing venture landscape my definition of what constitutes a renegade has broadened.

I've written about firms that exemplify the disrupting forces in venture. Homebrew pivoting to an evergreen fund made up of their own capital to get away from the undue burden of LP requirements. Lowercarbon using the greed of the market to tackle climate change with the absolute best products. And while these folks all have their own individual celebrity as investors; they're not just innovating by being themselves.

So my definition of a renegade has evolved:

Renegade: "Any fund or investor who is disrupting the status quo in venture and realigning their offering to optimize for a founder's needs and odds of success."

So let's lay out the landscape clearly. What is the status quo in venture that needs to be disrupted? How are venture funds stuck in an innovator's dilemma? And what do they need to change to keep up?

An Unimpressive Musical Menagerie

But first? Story time. I'm nobodies idea of a well-informed person when it comes to music. I'm a perfect example of a poser. My music taste has been an adaptive muscle based on who I was trying to impress. Before 2005 I was listening to country because that's what my parents listened to. In 2006 my brother got me into a weird combination of ska, jazz, and Weird Al. In 2007 I was listening to System of a Down and Paramore to impress a girl that had way too many strong emotions for me to handle. I was like a far-right Republican on Facebook. I'd be into whatever you told me about.

In 2008 I worked as a stage hand in a theatre where the director introduced me to Rage Against the Machine. Fast forward to today, I'm mostly listening to whatever Spotify's "Top Pop" playlist has for me (Again. Uninformed.) But one song stuck with me from my random smattering of musical experiences.

When I was looking for a word to describe the movers and shakers in venture, "Renegades of Funk" kept coming to mind. It's where I got the word renegades from. No VC should ever be famous; at least not for allocating capital. People with ideas that shape cultures or who build technology that changes lives: those are the people that should be celebrated.

Venture capital is a tool to help spread impactful ideas. The renegades are recognizing the opportunity to take their own philosophies and change the way ideas are funded.

The Disruptable

So what is the status quo in venture? What is the disruptable standard? Every time I explain some of the negative driving forces in venture it often comes back to the way VC firms have structured themselves. Since the 60's and 70's when old-school firms like Kleiner and Sequoia were getting started these firms were structured around a partnership. These partnerships were made up of mostly old white dudes and as far as the firm was concerned? They are God. They dictate every aspect of the strategy of the firm.

"No matter what they added or took away they've always been the center of the universe in their respective firms. Lots of partners, few partners. Do they offer help with talent? Do they find you customers? Do they invest exclusively in niche dog-related verticals or do they invest across all physical and digital mediums?"

As firms have grown in the kinds of things they do they've maintained this religious focus on "the partnership." Even when you have incredible data scientists, researchers, marketers, recruiters, or sales people join these firms? They bend to the will of "the partnership." Never mind that none of the partners have built a data pipeline before. Or have never run a marketing campaign. Or run an executive talent search. What the partners say? Goes.

This focus on the partnership as God has created a lot of negative incentives in a lot of firms, whether they're willing to admit it or not. For some people this is creating what I've called the "Magna Carta Moment" in venture. Talented people at great firms strike off to find what is a better fit for their skillset or interest.

The over-emphasis on one type of person, "the investor," has created negative incentives in and out of the partnership. In simplest terms, there are (1) partners, and (2) not partners.

Problems With Partners

When you find yourself in a VC fund as a partner there is still a power dynamic. Junior partners, senior partners, general partners, managing partners. The younger you are in your career the more you're focused on proving yourself and earning your place.

From a financial perspective partnerships are extremely cagey about who they share economics with. If you're managing a $500M fund let's say you 3x the fund. You have $1B of returns and $200M of carry that you can split. If you have 2 partners? You're getting $100M. If you invite in just 2 more partners you're cutting your piece of the pie in half. So you better be dang sure they add to the pie. This key piece of financial motivation is what keeps every partnership pretty gated in who they let in.

If you're a junior partner you're being judged pretty heavily on one thing: your ability to bring in good deals. There isn't as much value put on building the organization. The incentives and hierarchy of a typical venture partnership force you to be heavily output focused (good deals) vs. input focused (building systems).

I've written before about how this incentive structure makes trust difficult:

"No one trusts each other and you don't know how to sort through people. So you let these people prove themselves until you trust them. And you usually don't really trust them until you've already established your own career. Trust is a luxury."

Most firms will tell you they emphasize collaboration. They'll tell you they work to incentivize every aspect of the job of serving founders. But by and large firms have setup systems that force everyone to seek visibility and credit.

A friend of mine joined a venture firm as an investor after having worked at a startup. He expressed excitement about not only finding great companies to invest in but helping to improve their processes internally. How they tracked talent and gathered data. He told me about the advice one of the partners gave him.

"Honestly? I would focus more on just doing good deals. You're not going to get much credit for the internal piece and in some cases senior people don't want to do the process stuff so it will be negative for you in the long run. Just focus on your own deals."

The partnership structure forces people to focus on making sure they're getting credit for as many good deals as possible. Where are the incentives for training the next generation of investors? Building better processes for tracking companies? Creating networks for supporting founders? Again, that top-line focus can work if you're just incentivizing the sales team. But that's not how you build an organization!

Problems With Not Partners

First: Non-investor "not partners." The core job for a VC is helping founders improve their odds of success. In the olden days just helping founders access cash was a helpful tool. Times have changed. Capital is table stakes. So VCs have had to get more thoughtful in creating the product they offer to founders. This has extended to talent, business development, marketing, governance, etc.

The increasingly diverse set of things VCs can help founders with have pushed the boundaries of even the most self-confident VCs who think they can be an expert at anything. They can't. So they hire other talented people. But all roles in a venture fund aren't created equal. For non-investor participants you start to see a very different experience. I've written about this before.

"You often see the monolithic brand mothership start to crush the spirits of highly qualified partners. This is even more true of "adjacent partners." People that run data science, talent, business development, engineering, or IR within a fund. They're frequently treated as second-class citizens."

I've talked to so many people in "non-investor" roles at funds who feel like their lens could contribute more meaningfully to the firm. But if they want to "be an investor" they have to change what they do. If they're good at talent? They'll have to spend more time on the investing side; look more like an “investor.”

The "mold" of a typical investor. You know the type. Banking, consulting, business school, strategic finance or business development at a sexy startup. If you spike in identifying great talent? Or building relationships with ideal customers? Or building great products? Well you'll have to pivot your career to better fit that mold.

I can't stop thinking (and ranting) about how much this is like if the only way to progress in a company was for engineers or designers to eventually pivot to being on the sales team. If the best incentives in your company are around generating revenue then the only way to be successful is to "be a salesperson."

Second? Investor "non-partners." They're just partners-to-be. The funnel stays pretty much the same. They also have to prove themselves worthy of getting into the game. The majority of firms have created either a spoken or unspoken barrier between how collaborative investors can be with each other internally.

If you're an investor non-partner you typically work for one partner, maybe several. Your job is to bring them deals. Why would you bring a deal to a partner you don't work for? You want to serve the person who controls your fate. What if you bring in a deal that is in a sector you don't have a lot of experience in? You could bring in the non-partner investor who knows the space. But then there is only so much credit to go around. There is an "eat what you kill" mentality in venture that makes collaboration very difficult.

Some firms? They're upfront about it. "Your bonus this year is lower because you had to bring in so-and-so to close the deal." Other firms are much more passive aggressive. They would never say they didn't value your ability to collaborate, but there is an unspoken acknowledgement when everything that isn't bringing in a good deal by yourself doesn't get much more attention other than a "kudos" in the shared slack channel.

This hodge-podge of sales-driven ego and Spartan-like "prove yourself" mentality? That is the status quo that is so ripe for disruption.

The Innovator's Dilemma

In 1997 Harvard professor Clayton Christensen published a book called "The Innovator's Dilemma." There are a number of phenomenal lessons to be learned but I want to focus on this key idea of how large established players fail to innovate even when they desperately want to.

Large established firms do well by understanding the market in which they operate, listening to what customers want, and building for the mainstream. Disruption occurs when a new way of doing things emerges.

“By and large, a disruptive technology is initially embraced by the least profitable customers in a market. Hence, most companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late.”

One of the classic examples Christensen uses is the market for producing steel. I'll significantly simplify the idea. Big steel companies like U.S. Steel used the common practice of building large integrated steel mills that were expensive and acted as a barrier to entry. In 1965 a new method of producing steel was created using "minimills." The process was more efficient but at first it could only produce rebar. Big steel companies didn't care about rebar. It was poorer quality and lower margin. So they ignored this new methodology. But before they knew it "minimills went from zero market share in 1965 to 40 percent by 1995. To mark the impact on U.S. Steel, they were removed from the Dow Jones Industrial Average list of companies in 1991."

And we're on internet time now. So things move ever more quickly. Industry incumbents who get comfortable with their lead position struggle to adjust their course because it often means cannibalizing their existing business to succeed.

Disruption doesn't have to come from startups. It can come from established players with new methodologies (like Toyota). There is also plenty of proof that incumbents can disrupt themselves but it's difficult, rare, and requires a near-constant amount of internal reinvention (like Amazon disrupting their own physical book business with the Kindle.)

What Does This Mean For Venture?

Venture capital is a golden goose that has been structured to primarily serve a small minority of contributors at the expense of the vast majority of participants. And this has worked for venture funds because historically the brand of the firm has held the power, and the partners controlled the firm. But that's changing.

The minimills are coming for venture. Different founders. Different investors. Different operators. Different LPs. Old-school GPs are starting to look like U.S. Steel.

Founders want something different. VCs can dismiss things like crypto or climate tech. But guess what? The smartest people are tackling those areas with or without you. But hey. Your old way of doing things is comfortable. So stay there while the world moves on without you. Disruption doesn't come from new technology. It comes from unhappy customers.

“When executives at incumbent companies are asked: “What is disrupting your business?” they almost always answer with: “Technology X is disrupting our business” or “Startup Y is disrupting our business.” But recent research and analysis reveals flaws in that thinking. What these companies seem to have missed is that the most common and pervasive pattern of disruption is driven by customers. They are the ones behind the decisions to adopt or reject new technologies or new products. When large companies decide to focus on changing customer needs and wants, they end up responding more effectively to disruption."

So step 1? Figure out a way to disrupt your own sales-led hierarchy. Break down your org chart and rebuild it in the best possible way to serve a product that founders want. Maybe that means no junior people. Maybe that means the investors aren’t the center of the universe. Firms like Paradigm are leading the charge in rethinking what a valuable offering from a venture fund looks like.

Step 2? Get creative. There is no one way to be a renegade in venture. There is no one strategy. Being a renegade is acknowledging that the world is changing. And its changing more and more quickly. "You either get busy living or you get busy dying."

A lot of venture funds are sitting comfortably in a business model that worked great in 2006 or 1998. Then there are the other people. The renegades.

A venture fund built out of a talent agency.

A secondaries fund finding a home for "orphaned startups."

A VC whose only discernible skill is dank memes.

A podcast that turned into a $250M fund.

Another podcast that turned into both a venture fund and a media empire.

A venture firm that builds alongside founders to earn their equity stake.

A seed fund doing the hard work of "funding before its obvious" vs. getting in on the party round.

A new crop of micro-funds punching above their weight-class.

A seed investor who built a brand on something as simple as twitter, kindness, and transparency.

A GP who raised over $500M in under 100 days and is giving away 10% of their profits to a charitable foundation.

A crypto investor who raised $1.5B as a solo GP, which is not only the largest fund every raised by a female solo founding partner, but by ANY solo GP.

A world-class athlete who raised $111M to invest in "founders with diverse points of view."

I've said it before and I'll say it again.

"The world has woken up to the exciting world of venture and they're getting pretty dang creative. We'll see renegades emerge in areas like climate change, crypto, mobility, consumer apps, healthcare, and every other category. They can't win every deal, but they'll win the deals they've built just the right [product] to win."

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