Here's What Really Separates Top Tier VCs From The Rest

There is a question that has been rattling around my brain for the past several months, and has recently become a hot topic of conversation within our firm:

How does one build a highly-respected, sustainable firm that really makes a difference in venture investing? 

There is a lot tangled up in this question, including:

  • How we are perceived in the marketplace – do entrepreneurs actively seek out IA Ventures as their partner of choice? Do we work hard for our companies and actually add value to their efforts? Do other venture firms want us as strategic partners in their syndicates? Are we viewed as forward-looking and risk-taking or more opportunistic?
  • How are we looked upon by current and prospective LPs – are we pursuing a strategy that is highly profitable, differentiated and robust? Are we investing for near-term opportunities or pursuing a longer-term, thematic strategy?
  • How do we feel about ourselves – are we doing work that is fulfilling, makes us proud and leverages the full extent of our capabilities? Are we in this for the next 20, 30 years and beyond?

My friend Chris Dixon recently tweeted the following, which is remarkably in-line with my though process (highlights my own):

Top tier VCs are top tier for a reason. Smarter, longer term thinking, greater integrity.

Smarter? Hard to say. We stick to our knitting around our thematic focus which I think has helped us be smart in the deals we’ve chosen to do. Integrity? I’d like to think that those with whom we’ve engaged, be they portfolio companies, near misses or quick rejections, believe we’ve dealt with them in an open, honest ethical and transparent manner, regardless of whether we’ve made them happy. This also applies to other venture firms who have shown us deals, those whom we’ve brought into syndicates and other less-structured interactions. Longer term thinking. This is the criterion that keeps me up at night…

As the principal of a venture firm that gets a lot of deal flow, not to mention that we are a start-up in a sense, we constantly find ourselves playing defence. The vast majority of our time is spent on the filtering aspect of the deal business, expending substantial effort working to streamline the process at the top of the funnel in order that we can identify the highest-potential opportunities in an efficient manner. Perhaps we should be thanking our lucky stars that we have such problems: deal flow that tends to overwhelm our screening process, leading to very intense discussions about the allocation of time between existing and prospective portfolio companies. And since we make existing portfolio companies top priority, it places a premium on how we engage with entrepreneurs and identify the opportunities most likely to make it all the way through the funnel. Sounds rational, right?

The problem is, my thesis is that great venture firms neither live in the past nor the present: they live in the future. Thinking deeply about megatrends. Considering what people and businesses will need in years from now. Identifying shortcomings in current products and infrastructure. Taking into account macro factors and global capital flows. Living in the future is risky and hard, but promises the richest rewards for those who are best at prediction and have the capital and the stomach for the risk. Assuming my thesis is correct, the problem then becomes: how does a busy venture firm have the time to not merely field interesting ideas and to learn from passive flow, but to positively impact flow by actively seeking out and seeding big ideas that will impact the future but don’t look that way today? This is the magic I am looking for. Big. Future. Contrarian. Impossible for the faint-of-heart to grab onto and ride for the next 3-5 years.

This approach has nothing to do with diversification through portfolio effects, and everything to do with making a series of concentrated bets that are legged into as data is collected, execution is demonstrated and market opportunity becomes apparent over time. This kind of thinking is shaping and re-shaping our strategy at IA Ventures, and represents an acknowledgement of what we really want to be: a deeply engaged partner with management in pursuing big, honking ideas that many if not most think are nutty at the investment’s inception. But it has become clear to me that the greatest returns are reserved for those who are willing to “go rogue,” to pull a Costanza, to do the opposite of conventional wisdom. And when I look back at my public markets experience the same is true. Heavily trafficked ideas tend to end in tears, while those with well-researched, deeply-held thematic views tend to come out on top. I’ve merely translated my prior public markets experience into the venture asset class. I had never thought of it this clearly before but I believe this to be true. And away we go…


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