Venture Capital Bifurcation and Founder Agency in a Rapidly Evolving Market - Episode Hero Image

Venture Capital Bifurcation and Founder Agency in a Rapidly Evolving Market

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TL;DR

  • Venture capital firms must specialize as either large generalists or small specialists, as mid-sized generalists struggle to compete against both, leading to a "death of the middle."
  • The strongest companies secure "hostages," not just customers, by creating systems of record or vertical operating systems that are difficult to switch from, ensuring long-term stickiness.
  • Investing in founders requires identifying individuals with high agency who can materialize labor, capital, and customers, possess deep historical knowledge of their space, and are driven by strong motivations like revenge or redemption.
  • The rapid pace of technological advancement and increased competition in venture capital is compressing the time for companies to achieve scale, creating a "unicorn problem" where companies may face liquidity challenges before market maturation.
  • Moral hazard is a significant risk in venture capital, arising from excessive capital infusions or large secondary transactions that can disincentivize founders and investors from making difficult decisions or pursuing optimal outcomes.
  • The "greenfield bingo" investment thesis focuses on new companies entering markets with no dominant software, or software that performs the job of labor, enabling rapid scaling by offering cost-effective alternatives to human resources.
  • The "walled garden" investment thesis targets companies that have amassed unique, proprietary data, creating defensible moats that even advanced AI models cannot easily replicate, thus ensuring long-term value and stickiness.

Deep Dive

Venture capital is undergoing a fundamental shift, characterized by the "death of the middle" and a bifurcation towards either large generalist funds or small, highly specialized ones. This evolution is driven by increasing fund sizes and the prolonged private market lifecycle of companies, forcing investors to adapt their strategies to secure the best deals and generate meaningful returns.

The core of venture investing lies in identifying founders with exceptional agency who can materialize labor, capital, and customers, coupled with a deep understanding of their market's history. This "materializing" capability is crucial, especially as AI increasingly automates labor and new companies offer highly competitive solutions. The "hostages, not customers" thesis highlights the importance of building sticky products, often systems of record or vertical operating systems, that are difficult for enterprises to switch away from, even when superior alternatives emerge. This stickiness is paramount in "greenfield bingo" markets where rapid company creation allows for disruption, but long-term success hinges on capturing and retaining customer data and operations within a proprietary system.

The landscape is also shaped by the accelerating pace of technological innovation and the increasing competition for deals. Venture firms must navigate this by either becoming large, capable generalists able to offer significant support and capital, or by developing deep specializations within niche markets. The "death of the middle" means mid-sized, generalist funds struggle to compete, leading them to either scale up or shrink down. Furthermore, the "unicorn problem" and the rise of massive secondaries introduce moral hazard, where founders and early investors, having already achieved significant liquidity, may alter their risk appetite and strategic decision-making. This can lead to less disciplined capital allocation and a disconnect from the original mission, potentially hindering long-term value creation. The trend of AI integration into existing software further complicates this, creating opportunities for incumbents to add AI capabilities and maintain customer "hostages," while also posing an existential threat to software categories that can be easily replicated or automated. Ultimately, the ability of founders to demonstrate relentless focus, a deep understanding of historical context, and a powerful, often revenge-driven, motivation is paramount for navigating this complex and rapidly evolving venture ecosystem.

Action Items

  • Audit founder framework: Evaluate 5-10 portfolio companies for their ability to materialize labor, capital, and customers.
  • Create founder motivation rubric: Define criteria for assessing "Count of Monte Cristo" drive in 3-5 prospective founders.
  • Analyze "hostage" customer acquisition: For 2-3 portfolio companies, quantify the percentage of customers that are "hostages" vs. transactional.
  • Develop greenfield market assessment checklist: Identify 5 key indicators for evaluating markets with high new company creation rates.
  • Measure founder historical knowledge: For 3-5 recent investments, assess the depth of founders' study of their respective industries' histories.

Related Episodes

Key Quotes

"I think you want to invest in people that can materialize labor, capital, and customers. The way that I do it, just to be pithy about it, is we either want to buy any percent of something that is absolutely working, or high ownership of something that could work. The best companies have hostages, not customers. So probably of the unicorn class, I would bet that maybe 5% will ever be able to go public. We are buying out-of-the-money call options and we hope they expire in the money."

Alex Rampell explains his investment philosophy, emphasizing the importance of founders who can attract essential resources (labor, capital, customers) and the strategic advantage of companies with "hostages" (highly dependent customers) over mere customers. Rampell also frames venture investments as akin to buying out-of-the-money call options, highlighting the speculative nature and the hope for significant future value.

"Yeah, I mean, I think this sounds like a bad word when I say "death," but there is this kind of death of the middle that happens to a lot of our asset classes in general. In venture capital, it was a tiny, tiny asset class at the beginning. Now it's gotten bigger, but it's really more of the end state of a lot of these companies is huge."

Rampell discusses the evolving landscape of venture capital, noting a trend towards larger company outcomes and the diminishing presence of mid-sized exits. He suggests that the venture capital asset class has grown significantly, leading to a concentration of value in a smaller number of very large companies, thus creating a "death of the middle" for many investment opportunities.

"The entire job of venture capital is to find, pick, and win investments. If they're good investments, the winning is very, very hard, and the winning therefore goes to the person that is the best. You have to sell. This is a sales job, you know this, right? You have an entrepreneur, they're amazing, they don't come along very often. If this is the best entrepreneur you've ever met, you have to convince them to take your money."

Rampell asserts that venture capital is fundamentally a sales-driven profession, not just about identifying promising investments but also about actively securing them. He emphasizes that winning the best deals requires convincing exceptional entrepreneurs to accept funding, highlighting the competitive nature of deal-making and the importance of a strong pitch.

"I really, really like people that have studied the history of the space. And I say this because the best entrepreneurs that I've met, they have learned everything about the space. To show what a great investor I am, when I was running my company, TrialPay, I met with, I think, I think Patrick Collison. I know a lot about payments. I've been doing like payment stuff since 1997 on the internet... Meet Patrick, and obviously I passed on doing the seed round of Stripe because I'm a genius."

Rampell shares his preference for investing in entrepreneurs who demonstrate deep knowledge of their industry's history, citing his own experience with Patrick Collison of Stripe as an example. He humorously admits to missing the opportunity to invest in Stripe's seed round due to his own biases, underscoring the value of founders who have thoroughly researched their domain.

"The best companies have hostages, not customers. So if there's a company that has something marginally better than Workday, right? They're not going to go, like Workday has hostages, they don't have customers. They're not going to go be able to sell GE and say, 'Oh, wow, I love you, you know, YC kids. Like I'm totally switching my HRIS from shitty Workday to amazing, you know, AI whatever YC Silicon Valley HRIS.' Never going to happen."

Rampell elaborates on his "hostages, not customers" thesis, explaining that companies with deeply integrated systems and high switching costs (hostages) are more defensible than those with easily replaceable offerings. He uses Workday as an example, arguing that its entrenched position makes it difficult for competitors to lure away its clients, even with superior features.

"Probably of the unicorn class, I would bet that maybe 5% will ever be able to go public, which is kind of shocking, right? And then because so much money has gotten into venture capital, you have this problem of, I mean, I, I, I will say on the record, I hate massive secondaries because it kind of turns you from the kind of money Christo to like the, you know, whatever the opposite of that would be, like the, 'I'm now go vacation in the, Côte d'Azur or something like that.'"

Rampell expresses concern about the low probability of many "unicorn" companies successfully going public and criticizes large secondary transactions. He argues that these secondaries can create a disconnect between founders and employees/investors, as founders may cash out significantly while others remain invested in a potentially struggling company.

"I think it really is find high agency people that know the history of the space, that can materialize labor, capital, and customers, that are the Count of Monte Cristo, and don't second-guess anything. Give them the money, be their best partner, and go versus, you know, question the market, question the this. I think it really is, I've just become 100% convinced this is entirely about people. 100% at every round, by the way."

Rampell reiterates his core investment belief: success hinges almost entirely on the quality of the people involved. He emphasizes the importance of founders with high agency, deep historical knowledge, the ability to secure resources, and strong motivation, asserting that these human factors are paramount at every stage of investment.

Resources

External Resources

Books

  • "The Count of Monte Cristo" by Alexandre Dumas - Mentioned as a story of revenge and motivation beyond financial gain.

People

  • Alex Rampell - General Partner at Andreessen Horowitz (a16z), leads their apps fund, investor in Mercury, Plaid, Open Door.
  • Harry Stebbings - Host of the 20VC podcast.
  • Mickey Malka - Investor at Ribbit Capital, mentioned for his fund's high returns.
  • Josh Krishna - Mentioned for investment advice about not doing a deal if willing to take less.
  • Kamala Harris - Quoted regarding "yodely" and its impact on valuation.
  • Yogi Berra - Quoted for his saying, "When you come to a fork in the road, take it."
  • Dave Duffield - Founder of Workday, mentioned in relation to starting Workday after a hostile takeover of PeopleSoft.
  • Renaud Laplanche - Founder of Lending Club and Upgrade, mentioned for his motivation after being fired from Lending Club.
  • Patrick Collison - Co-founder of Stripe, mentioned for his knowledge of payment systems history.
  • John Collison - Co-founder of Stripe, mentioned for his study of payment systems history.
  • Vlad Tenev - CEO of Robinhood, mentioned for studying payment systems history.
  • Purva - Founder of Instacart, mentioned for meeting with the founders of Webvan.
  • Brian Chesky - CEO of Airbnb, mentioned for studying the history of the bed and breakfast and hotel industry.
  • Edmund Dantes - Protagonist of "The Count of Monte Cristo," mentioned as an example of motivation for revenge.
  • Larry Ellison - Mentioned in relation to Dave Duffield and PeopleSoft.
  • Jeff D - Mentioned as a potential super genius for the IRS.
  • Gnome Shazier - Mentioned as a potential super genius for the IRS.
  • Zack - CEO of Plaid, mentioned in relation to a Series B funding discussion.
  • Ala Kelly - Mentioned in relation to Visa.
  • Jan Koum - Founder of WhatsApp, mentioned as an example of a CEO directly involved in an acquisition.
  • Tony Hsieh - Former CEO of Zappos, mentioned for his philosophy on customer support as a revenue center.
  • David George - Mentioned as a master of advice on selling companies.
  • Jason Lemkin - Mentioned for his prediction about the demonization of technology leaders and labor displacement.
  • Martin Casaroo - Mentioned for his tweet about founder-centricity in venture capital.

Organizations & Institutions

  • Andreessen Horowitz (a16z) - Venture capital firm, mentioned as the host of the podcast and employer of Alex Rampell.
  • 20VC - Podcast hosted by Harry Stebbings.
  • Ribbit Capital - Investment firm, mentioned for its high fund returns.
  • Angel Pad - Accelerator/fund, mentioned as a competitor to Y Combinator with high returns.
  • Sequoia - Venture capital firm, mentioned in relation to market cap of its portfolio companies.
  • Y Combinator - Startup accelerator, mentioned as a benchmark.
  • Khosla - Venture capital firm, mentioned for its focus on Latin America.
  • Khosla Ventures - Mentioned in relation to a focus on Latin America.
  • KKR - Investment firm, mentioned in comparison to venture capital in private equity deals.
  • Blackstone - Investment firm, mentioned in comparison to venture capital in private equity deals.
  • RJR Nabisco - Company, mentioned as an example of a private equity takeover target.
  • Facebook - Social media company, mentioned as an example of a highly sought-after investment.
  • Coinbase - Cryptocurrency exchange, mentioned as an example of a successful investment.
  • OpenAI - Artificial intelligence research company, mentioned as a competitor and employer of talent.
  • Anthropic - Artificial intelligence research company, mentioned as an employer of talent.
  • Meta - Technology company, mentioned as an employer of talent.
  • Pro Football Focus (PFF) - Mentioned as a data source.
  • NFL (National Football League) - Professional American football league, mentioned in relation to sports analytics.
  • New England Patriots - Professional football team, mentioned as an example team for performance analysis.
  • Mercury - SMB bank, mentioned as an investment by Alex Rampell.
  • Plaid - Financial technology company, mentioned as an investment by Alex Rampell and a missed deal.
  • Open Door - Real estate company, mentioned as an investment by Alex Rampell.
  • Toast - Restaurant POS company, mentioned as an example of a vertical SaaS company.
  • Vlex - European legal tech company, mentioned as an example of a walled garden strategy.
  • OpenEvidence - Health data company, mentioned as an example of a walled garden strategy.
  • Salesforce - Software company, mentioned as a potential acquirer.
  • Visa - Financial services corporation, mentioned as a potential acquirer of TrialPay.
  • PayPal - Financial services company, mentioned as a potential partner and acquirer.
  • Greylock - Venture capital firm, mentioned for investing in Facebook and TrialPay.
  • Meritech - Venture capital firm, mentioned for investing in Facebook.
  • Battery Ventures - Venture capital firm, mentioned in relation to a Series A investment in TrialPay.
  • SideAdvisor - Mentioned in relation to a Series A investment.
  • General Catalyst - Venture capital firm, mentioned for its credit fund and roll-up strategy.
  • Zendesk - Software company, mentioned as an example of a SaaS company potentially impacted by AI.
  • Adobe - Software company, mentioned as an example of a SaaS company potentially impacted by AI.
  • United Airlines - Airline company, mentioned in relation to customer service and AI.
  • Zappos - Online shoe and clothing retailer, mentioned for its customer service philosophy.
  • JP Morgan - Financial services company, mentioned in relation to a talk on AI and wealth management.
  • Stripe - Financial technology company, mentioned as a missed investment opportunity.
  • Robinhood - Financial services company, mentioned for its founder studying payment systems history.
  • Instacart - Online grocery delivery company, mentioned for its founder studying Webvan.
  • Webvan - Online grocery company, mentioned as a historical example.
  • PeopleSoft - Software company, mentioned in relation to Dave Duffield and Workday.
  • Workday - Software company, mentioned as an example of a company potentially impervious to AI and as an employer of talent.
  • Chase Payment - Mentioned as a payment processor.
  • Lending Club - Financial technology company, mentioned in relation to its founder.
  • Upgrade - Financial technology company, mentioned in relation to its founder.
  • Trialpay - Payment processing company, mentioned as founded by the speaker and sold to Visa.
  • Google - Technology company, mentioned as a potential acquirer and employer of talent.
  • Amazon - E-commerce company, mentioned in relation to its IPO market cap.
  • Apple - Technology company, mentioned as an infrastructure player for PCs.
  • Cisco - Technology company, mentioned as an infrastructure player for the internet.
  • Akamai - Content delivery network, mentioned as an infrastructure player for the internet.
  • Microsoft - Technology company, mentioned as an infrastructure player for PCs and creator of Lotus 123 competitor.
  • Lotus 123 - Spreadsheet software, mentioned in relation to Microsoft.
  • Visicalc - Spreadsheet software, mentioned as the first spreadsheet.
  • Netsuite - Software company, mentioned as having "hostages" and being impervious to AI.
  • San Francisco 49ers - Mentioned in relation to sports analytics.
  • San Francisco Giants - Mentioned in relation to sports analytics.
  • San Francisco Warriors - Mentioned in relation to sports analytics.
  • San Francisco Sharks - Mentioned in relation to sports analytics.
  • San Francisco Bulls - Mentioned in relation to sports analytics.
  • San Francisco Dragons - Mentioned in relation to sports analytics.
  • San Francisco Demons - Mentioned in relation to sports analytics.
  • San Francisco Flames - Mentioned in relation to sports analytics.
  • San Francisco Sabers - Mentioned in relation to sports analytics.
  • San Francisco Breakers - Mentioned in relation to sports analytics.
  • San Francisco Fog - Mentioned in relation to sports analytics.
  • San Francisco Pioneers - Mentioned in relation to sports analytics.
  • San Francisco Gold - Mentioned in relation to sports analytics.
  • San Francisco Americans - Mentioned in relation to sports analytics.
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