The Great Unbundling of Venture Capital

Great unbundling headline

“The old Series A investor who put in $2 million and really cared and had resources is dead.”

Gil Penchina is not a man who minces words. Pando has detailed, at length, a number of forces that have deteriorated the "first money in" position of traditional Sand Hill Road VCs. Manu Kumar of pre-seed fund K9 Ventures has recently argued they are now usually the fourth round in.

Naval Ravikant of AngelList would say that’s unequivocally bad for traditional VCs. It has some benefit for entrepreneurs: There are more places than ever to get that early cash. The problem is that many of those sources don’t do all the things a Series A VC used to do during the boutique glory days of the industry. Some simply don’t want to.

“A seed fund doesn’t have the resources that a Kleiner Perkins or a Benchmark had,” Penchina continues. “Incubators help for three months and then kick you out. AngelList syndicate leads help, but they don’t care enough to help as an old, classic $2 million VC did. These platforms are all trying to rebuild that to some degree, but I’m not totally buying it. Entrepreneurs have to stitch it together themselves.”

Mark Goldstein, founder of Bad Ass Advisors, puts it another way: We are midway through a great unbundling of what a VC used to be.

Here’s his rant: “There are so many more companies being started than ever before and there are more former entrepreneurs than there have ever been before. There are so many younger entrepreneurs without experience than ever before. Then you have venture firms that have raised too much cash and have to do more deals and are stretched too thin. Then there are syndicates and all these new ways to raise capital. The truth is the angels all have day jobs and they can’t really help companies be successful. Meantime a lot of these people are sitting on the sidelines and could really, really help these companies.”

Don’t get Goldstein started on incubators: “Bad advisors can do more harm. In incubators, companies will have this stream of people that show up for 15 minutes and give them completely disparate advice and have no context of the business.”

I nod hearing all of this. Yep. And I add another big factor: A lot of the traditional VCs have totally abdicated the roles they used to play in terms of corporate governance too.

Many entrepreneurs don’t want VCs taking board seats – whether inspired by entrepreneurs like Facebook’s Mark Zuckerberg and Snapchat’s Evan Spiegel who view a lean, entrepreneur-stocked board as next to godliness, or entrepreneurs like Uber’s Travis Kalanick who brag to other entrepreneurs about how short their board meetings are.

And, frankly, a lot of VCs are all too happy to be passive investors, unburdened by the heavy fiduciary duties of a board seat.

I bring up sudden flame outs like GigaOm, Quirky, and Zirtual, and that last one sets Goldstein off. He knew Marin Kate Donovan, the Zirtual CEO. “Tony [Hsieh] would show up once a quarter for coffee, and I’d meet with her later and she would say, ‘Tony says I don’t need a board,’” he recalls. This isn’t meant to diss Hsieh [disclosure: a Pando investor] – a lot of former entrepreneurs turned investors have given the same advice. At an early PandoMonthly, Mark Pincus called Yuri Milner the ideal investor since he gave you cash and then went away unless you needed something from him.

Goldstein continues, “She was extremely well intended but she came from outside the industry. Kaboom. And HomeJoy? Kaboom. And believe me – a lot more bombs are coming down the road.”

“Entrepreneurs see all trees but not any forest,” he says. “My first company in the 1980s, I would spend weeks preparing. Peter Crisp, one of the original founders of Venrock, was on my board and he used to just kick my ass. We had our meetings up in the top floor of Rockefeller Center and by the end I would just want to jump.”

For many entrepreneurs – particularly the ones burning the most capital, employing the most people, and operating in the unicorn valuation range – those days are long gone.

So much of the talk about the impending venture capital and private equity crash has centered around burn rates and unsustainable valuations. Another unique factor compared to the last tech crash is that the bulk of the at-risk, free-spending unicorns are privately held with no public market-style oversight.

But just as complicit –and far less talked about – is a cultural change in venture capital that Penchina, Goldstein and others point to: There’s far less investor oversight than there was in cycles before, far less useful help and advice.

The reason is part of what’s been so great and so empowering for entrepreneurs in recent years: Way less need for big bucks to get started, way more places to look for cash, and way more power to dictate the terms.

But careful what you wish for. As traditional VCs have been squeezed somewhere between the third or fourth round of capital, and the Fidelity’s and Coatue’s of the world have edged from IPOs to private D and E rounds, the role VCs used to play in a company have also gotten squeezed into that narrow window. Things like helping to recruit talent, making introductions to potential customers, or even thinking through strategy and the accountability of regular board meetings. “When Fidelity invests, they aren’t exactly taking a board seat,” Penchina says.

All that said, Goldstein and Penchina don’t think the answer is shoving the genie back in the bottle and yearning for bygone days. Instead, it’s embracing these disruptive forces to build out all those abandoned services anew. Quietly over the summer, each has built new services that sit on top of AngelList and are inspired by its approach.

On Monday, we published an in depth profile of Ravikant’s slow, methodical journey to make AngelList a permanent fixture underlying and changing the way capital is raised and investors are organized. Whenever a new technology platform emerges and starts to snowball through well-engineered network effects, a constellation a companies emerge to ride along next to it, in a symbiotic relationship.

It’s like those birds that sit on top of water buffalos. They clean the water buffalos and get a tasty meal in the bargain. The big companies can’t possibly provide all the features, tools, and apps consumers want. Likewise, the smaller companies benefit from being the tiny bird getting ass loads of snacks as the water buffalos roam around tick-free.

Consider Microsoft, Apple’s iPhone, Facebook, and so many other platforms that came before.

But just as in nature, these relationships are sometimes parasitic or simply feature a host that benefits more than the hangers-on (see: Facebook, and well, everyone who has ever relied on its platform.)

The best are ones when – like the bird and the buffalo – both parties win. Such is the case with AngelList and a budding crop of companies like Penchina’s AngelMob and Goldstein’s Bad Ass Advisors – who have organically developed on top of it.

Both Penchina and Goldstein have been around the Valley for a long time in various roles, and, unlike many of their friends, didn’t feel like just migrating into being a VC. But being yet another angel or AngelList syndicate leader also can be… unsatisfying. As friends of the AngelList founders and enthusiasts of the network effects they were methodically building, both spotted an opportunity to provide entrepreneurs part of what VCs used to do in a bygone, boutique era.

Each has a different slant on helping entrepreneurs the way VCs used to do. And like AngelList, they don’t want to get paid directly. They will make money in some form of equity if they provide enough value and succeed. (More on that in a bit.)

Bad Ass Advisors was launched late in July by Goldstein. He aims to do a better job of pairing the thousands of former entrepreneurs in the Valley who would love to be advisors with the thousands of companies who need one.

Sure, a lot of founders have advisory boards, but few add real value. A lot are just NASCAR-like amalgamations of names to put on a slide before raising a seed round. Also, what you need when your company is a mere idea is dramatically different than what you need later on.

And arguably, there are more potential advisors floating around the Valley than ever before… and in any ecosystem anywhere in the world. Many are hungry for the opportunity, not just for the sliver of equity they may get or an altruistic need to give back.

“They want relevancy,” Goldstein says. “Everyone has self-selected to be in this business and they want to stay on top of their game. That means getting as close to great companies as they can and understanding the challenges they have today.” They also want a way to get measured, scored, and graded for giving good advice, he adds.

It’s not just that thousands of entrepreneurs are floating around the Valley, it’s that a lot of them have a lot of free time. They had enough success, they don’t need another grueling startup job, and many of them aren’t willing to sign up for the long slog of founding another company. But they need to do something, and being an angel isn’t quite full time enough. There’s a huge “baby boomer”-like wave of people in their thirties and up who moved here during the dot com gold rush, started companies, did well enough they don’t have to work, but have recently started families and don’t want to start a new company. The world doesn’t necessarily need another seed fund. Many don’t quite know what to do with themselves.

Goldstein has been collecting thousands of them through LinkedIn, through referrals of friends, through word-of-mouth. He vets them, and pairs them with a startup he’s also vetted who says they need help.

Would be “bad ass advisors” have to have experience at an early stage startup, after a LinkedIn vetting, he may admit them. But he doesn’t introduce them to a startup until they fill out an actual application. They have to detail three amazing stories of how they helped companies in the past. “If they can’t do that this is all bullshit and they don’t really care,” he says.

Companies have a similar process to get matched. They fill out three brief descriptions of the kind of advisor they want and the skills they need. Goldstein needs to know they are serious too.

The next steps are automated-- the legal stuff and contracts are standard and pre-baked (inspired by AngelList no doubt.) They set terms on how often the advisors need to meet with the startups. And the two sides get a 30-day grace period. “If it doesn’t work, no one owes anyone anything,” he says.

There are plenty of companies that have had great advisors, just like angel investing wasn’t anything new before AngelList. But generally finding them has relied on serendipidity or the special form of happenstance that VCs excel in.

Penchina’s AngelMob is even more automated. It’s essentially a software service that acts as a kind of mechanical turk where members of his AngelList syndicate, FlightVC – the largest on the site – can perform specific tasks for companies in his portfolio. “AngelList has the capital, Mark has advice, AngelMob helps with specific things like recruiting,” he says. “These are all object-oriented pieces that entrepreneurs can assemble as they need them.”

Penchina started as a syndicate lead and was limited on how many investors he could put in different deals. When would-be syndicate members would complain of why they didn’t get in a certain round, he devised a way to let them prove they could add value. His software system lets him leverage a crowd of some 3,000 angels.

AngelMob doesn’t try to be the old venture model, it doesn’t even try to be as high-fidelity as Goldstein’s Bad Ass Advisors. It aims to get little bits of help from lots of people. “If you are trying to recruit a great head of sales, you may ask to help source candidates,” Penchina says. “Three thousand people will be asked to send you names.”  

The lowest-intensity tasks get the best engagement on AngelMob. Promoting something on social media, for instance. Other tasks are things like introductions to particular companies, or help recruiting specific roles. It’s like entering tasks into an Asana-like system. The expectation is for tasks that can add value at a specific point, but take five to ten minutes of a connected angel’s time.

“I essentially made it into a game,” Penchina says. “The people who help the most get preferred access to our deals. We have a leaderboard that tracks who does the most. Companies love it because they are like, ‘Shit yeah, I want angels who actually help.’”

Because he’s investing in these companies, what Penchina gets out of this is pretty straightforward. It’s a little different with Goldstein, who like Ravikant is playing a long game here. He’s keeping costs low, trying to build critical mass, and avoiding any payment that would create friction in the process. If it continues to work, he’ll make money. Right now, he enjoys dropping his kids off at school, staying relevant himself by meeting young companies, and hooking up people like him who want something more substantial to do in this new reality.

It’s hard to know how big these services could get or how many “object oriented” pieces can be built on top of AngelList. AngelList has been growing into so many areas itself – like jobs and arranging special purpose vehicles for VCs – that white space may shrink over time.

One of the biggest problems is that these systems tend to replace the gate-keeper roles of Sand Hill Road with an automated online network – but one that is also pretty relationship oriented. Goldstein, for one, admits that his network is limited to major tech hubs where there’s a critical mass of great advisors, even though smaller tech hubs arguably need the service more.

The Internet has never quite lived up to its hype of democratizing the world of startups and venture capital. The bulk of the capital still comes from and goes to Silicon Valley companies, and the bulk of the exits come from here too. These tools may change the way companies are built, but they likely won’t dramatically change who builds them or where.

Reprinted with permission from Pando