Venture Capital Consolidation Favors Specialists and Generalist Giants - Episode Hero Image

Venture Capital Consolidation Favors Specialists and Generalist Giants

The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch · · Listen to Original Episode →
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TL;DR

  • The venture capital landscape is bifurcating into large generalists and small specialists, with mid-sized generalist funds facing significant challenges due to intense competition and LP demand for gross dollar returns.
  • The most successful founders possess high agency, a deep understanding of their domain's history, and the ability to materialize labor, capital, and customers, driven by a "Count of Monte Cristo" level of motivation.
  • "Greenfield bingo" markets, where new companies are created at a high rate, enable startups to gain traction by offering superior products to nascent businesses, bypassing established incumbents with "hostages" rather than customers.
  • Companies with "hostages" -- deeply embedded systems of record or those controlling critical data -- possess inherent stickiness, making them resilient to competition even as AI accelerates product development cycles.
  • The rapid compression of time between innovation and market disruption necessitates a focus on building defensible "walled gardens" of unique data or sticky systems of record to counter the increasing promiscuity of customers.
  • Moral hazard is a significant risk in venture capital, arising from excessive capital infusions or large secondary transactions that can disconnect founders and investors from the necessity of disciplined decision-making and focused execution.
  • The "Series A trap" is a concern due to inconsistent nomenclature and inflated valuations, where companies may exhibit minimal progression or product-market fit, making it a potentially poor investment stage without careful due diligence.
  • The future of venture capital involves technology further embedding itself into all sectors, creating new markets and displacing labor through AI-driven efficiency, while successful companies will likely possess sticky systems or unique data moats.

Deep Dive

Venture capital is consolidating into large generalists and small specialists, creating a "death of the middle" for mid-sized funds that cannot compete on scale or niche expertise. This shift is driven by the increasing size of technology companies and the need for VCs to deploy more capital, forcing a re-evaluation of how returns are generated, moving from high multiples on small funds to significant gross dollar returns on larger funds. The core of successful venture investing, regardless of fund size or strategy, remains identifying and backing exceptional founders with high agency who can materialize labor, capital, and customers, particularly those with a deep understanding of market history and an intense, almost vengeful motivation to succeed.

The venture landscape is increasingly characterized by the "hostage" model, where companies aim to create sticky systems of record or vertical operating systems that are difficult for customers to switch from, rather than relying solely on customers who can easily defect for marginally better alternatives. This stickiness is crucial as the speed of innovation and competition intensifies, enabling startups to challenge incumbents much faster than before. While rapid revenue growth is attractive, its sustainability depends on building these defensible moats. The rise of AI further complicates this, creating new infrastructure and application layers, but also intensifying competition and potentially displacing labor in certain sectors. However, AI also offers opportunities for companies to become more efficient, reallocating resources towards customer relationship building or developing entirely new markets, underscoring the enduring importance of founder vision and execution in navigating these evolving dynamics. Ultimately, venture success hinges on backing founders with extreme drive and the ability to adapt, whether by capturing "hostages" through sticky products or by leveraging AI to create entirely new value propositions.

The venture capital industry is undergoing a structural shift, pushing mid-sized, generalist funds towards obsolescence. This consolidation, driven by the increasing scale of technology companies and the LP preference for substantial gross dollar returns, favors large, diversified firms or highly specialized boutiques. The "death of the middle" implies that mid-tier funds must either significantly scale or narrowly focus their investment thesis to survive. This dynamic underscores the central role of exceptional founders, characterized by high agency and a deep understanding of market history, as the primary drivers of venture success. These founders, fueled by intense motivation, are best positioned to materialize critical resources--labor, capital, and customers--and build defensible businesses. The increasing pace of technological change, particularly with AI, further emphasizes the need for founders to create "hostages" through sticky products and systems of record, as customer loyalty is becoming increasingly fragile. While rapid revenue growth is a strong indicator, its long-term viability depends on building sustainable competitive advantages that can withstand rapid innovation cycles and potential labor displacement, making founder quality and strategic product development paramount to navigating the future of venture capital.

Action Items

  • Create founder evaluation framework: Assess agency, domain expertise, and motivation (Count of Monte Cristo) for 3-5 key hires.
  • Audit current investment thesis: Identify 2-3 "greenfield bingo" market opportunities for potential future investment.
  • Design sticky product strategy: Define 3-5 features that leverage data lock-in for new product development.
  • Develop risk-balancing model: Calculate optimal ownership percentage for Series A investments based on market potential.
  • Track labor displacement impact: Monitor 5-10 roles for AI-driven efficiency gains and potential reallocation opportunities.

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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 like we either want to buy any percent of something that is absolutely working or high ownership of something that could work."

Alex Rampell argues that successful investment hinges on identifying individuals capable of generating labor, capital, and customers. Rampell clarifies his investment strategy by stating a preference for either acquiring a stake in a demonstrably successful venture or securing significant ownership in a promising, albeit not yet proven, one.

"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 posits that the most resilient companies secure "hostages," implying deeply integrated customers or dependencies, rather than merely customers who can easily switch. Rampell also expresses skepticism about the public market viability of most "unicorn" companies, likening venture investments to purchasing out-of-the-money call options that are expected to become profitable.

"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."

Alex Rampell describes a trend of "death of the middle" within venture capital, suggesting that firms are increasingly forced to be either very large generalists or very small specialists. Rampell notes that the venture capital asset class has grown significantly, and companies tend to reach their massive end-state valuations much later in their lifecycle.

"Every LP says the canonical wisdom and the theory of venture is as you scale, performance goes down. Do you legitimately think then that with the expansion of these markets, you can maintain 5x plus net funds at scale?"

The interviewer questions Alex Rampell about the conventional wisdom among Limited Partners (LPs) that fund performance declines with increased scale. The interviewer asks if Rampell believes it's possible to maintain high returns, such as 5x net funds, despite the expansion of market size and fund size.

"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, like this is a sales job, you know this, right?"

Alex Rampell asserts that the core function of venture capital is to identify, select, and secure investments. Rampell emphasizes that winning the best deals is exceptionally challenging and goes to the most skilled individuals, framing the process as a sales job requiring the ability to convince entrepreneurs to accept their capital.

"I think it's like what you did is not normal. You had agency and said, 'I am going to not do the normal thing. I'm going to go email every famous VC to death and get them to talk to me.' It's pretty incredible what you've done. That's a very rare trait."

Alex Rampell praises the entrepreneur for demonstrating exceptional agency and initiative by pursuing an unconventional path and persistently contacting venture capitalists. Rampell highlights this proactive approach as a rare and remarkable trait, distinguishing it from typical behavior.

"The way to explain this financially is we buy out-of-the-money call options. You know what a call option is, right? We are buying out-of-the-money call options, and we hope they expire in the money because this is how I explain to people like why it is that a Series A that has a million dollars in revenue and is losing $10 million a year is worth $100 million."

Alex Rampell explains the financial concept behind early-stage venture investments by comparing them to out-of-the-money call options. Rampell uses this analogy to illustrate how a company with significant revenue but substantial losses can achieve a high valuation, such as $100 million for a Series A round with $1 million in revenue.

"I think we have, we have three. We have one, which is we invest in systems. Like I call it greenfield bingo, and most of the green, like these are existing software companies, but selling to new companies as opposed to, you know, selling to the hostages that will never leave. They tend to be systems of record or vertical operating systems."

Alex Rampell outlines one of his fund's three investment theses, focusing on "greenfield bingo" investments. Rampell describes this as investing in existing software companies that target new businesses rather than established ones with high customer loyalty, emphasizing systems of record and vertical operating systems.

"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 to YC kids. I'm totally switching my HRIS from shitty Workday to amazing, you know, AI whatever YC Silicon Valley HRIS.' Never going to happen."

Alex Rampell reiterates his belief that the most successful companies secure "hostages," meaning customers who are deeply integrated and unlikely to switch. Rampell illustrates this by explaining that even a marginally superior product would struggle to displace an established system like Workday, which has deeply embedded "hostages" within large organizations like GE.

"I think this is a big challenge. I mean, if you look at all of the unicorns and how many conform to Rule of 40, it's pretty small. Many of them are shrinking. So probably of the unicorn class, I would bet that maybe 5% will ever be able to go public, which is kind of shocking, right?"

Alex Rampell identifies a significant challenge within the "unicorn" class of companies, noting that few adhere to the Rule of 40 and many are experiencing shrinking growth. Rampell expresses surprise at his own estimation that perhaps only 5% of these highly valued companies will eventually go public.

"I hate massive secondaries because it kind of turns you from the Count of Monte Cristo to like the, you know, whatever the opposite of that would be, like the, 'I'm now going to go vacation in the Côte d'Azur,' or something. That's going to now say, 'I am now at a fundamental disconnect from my employees and my investors because I'm rich and they aren't.'"

Alex Rampell expresses strong disapproval of large secondary transactions, arguing that they can diminish a founder's drive and create a disconnect between founders and their employees and investors. Rampell uses the analogy of transforming from a driven "

Resources

External Resources

Books

  • "The Count of Monte Cristo" by Alexandre Dumas - Mentioned as an example of motivation beyond financial gain, illustrating the drive for revenge or redemption.

Articles & Papers

  • "Barbarians at the Gate with an AI" - Mentioned as a piece written by the speaker about the trend of private equity firms acquiring companies and adding AI capabilities.

People

  • Alex Kelly - Mentioned as an individual at Visa who was hosted at a dinner by the speaker.
  • Dave Duffield - Mentioned as an example of a founder who, after a hostile takeover, started Workday with a motivation for revenge against Larry Ellison.
  • Edmond Dantès - The protagonist of "The Count of Monte Cristo," used as an example of extreme motivation for revenge.
  • Jeff D. - Mentioned as a hypothetical super genius who, along with Gnome Shazir, would make the IRS highly efficient.
  • John Collison - Mentioned as having given the speaker a book on the origins of the payment system, demonstrating a deep study of history.
  • Josh Krishna - Mentioned as having given the speaker investment advice: "if you're willing to take less, don't do the deal."
  • Kamala Harris - Quoted regarding the phrase "oh wow yodally," used in the context of discussing past company valuations.
  • Larry Ellison - Mentioned in relation to Dave Duffield starting Workday after a hostile takeover of PeopleSoft.
  • Marty - Mentioned as part of the talented team behind 11 labs.
  • Mickey Malka - Mentioned as a friend and investor in his fund, which achieved a 55x return, and as someone who mentored the speaker.
  • Nick - Mentioned as the CEO of Relit, possessing a "counter amount of Christo" motivation.
  • Patrick Collison - Mentioned as someone the speaker met when running Trialpay, who knew everything about the history of payment systems, and who the speaker passed on investing in at the seed round of Stripe.
  • Renuad Laplanche - Mentioned as the founder of Lending Club who, after being fired, started Upgrade with a motivation for revenge.
  • Reid - Mentioned as someone the speaker met 20 times before pitching him for a Series D round at Trialpay.
  • Simran - Mentioned as a member of the speaker's team who lost a deal to.
  • Tony Shay - Mentioned as the former CEO of Zappos, known for his philosophy of viewing customer support as a revenue center.
  • Vlad - Mentioned as the founder of Robinhood, who studied history, and as someone who would be promiscuous with backend models.
  • Webvan founders - Mentioned as individuals met by Pervert at Instacart to study history.
  • Yogi Berra - Quoted for the expression "When you come to a fork in the road, take it."
  • Zach - Mentioned as the CEO of Plaid, with whom the speaker debated valuation differences.

Organizations & Institutions

  • 11 Labs - Mentioned as a company that was a non-consensus deal at seed stage, competing with OpenAI.
  • Angel Pad - Mentioned as a small experiment that achieved a 120x return.
  • Airtable - Mentioned as a company whose business is run by over 80% of Fortune 100 companies, combining AI with a no-code system.
  • Blackstone - Mentioned as a firm that, along with KKR, would compete to take a public company private.
  • Brex - Mentioned as an organization that uses Metaview.
  • CHASE Paymentech - Mentioned as a payment processor that was the existing solution before Stripe.
  • Cisco - Mentioned as an infrastructure layer player for the internet.
  • Dev Payments - The original name of Stripe when the speaker encountered it.
  • eBay - Mentioned as an example of a company that was once a service provider to big companies.
  • Eve - Mentioned as a company that sells into plaintiff attorneys, effectively doing the job of labor.
  • Facebook - Mentioned as a company that everyone wanted to invest in, and as an example of a market winner where rules were thrown away.
  • Frontier Labs - Mentioned as a company facing limitations with models in real-world tasks.
  • Fortune 100 - Mentioned as companies running their businesses with Airtable.
  • General Catalyst - Mentioned as having a fund that does a roll-up play and a consumer performance marketing fund, and as having a credit fund.
  • Gemini - Mentioned as a leading lab that partners with Turing.
  • Ge - Mentioned as a potential customer for a Workday alternative.
  • Google - Mentioned as a company that wanted to buy Trialpay at a certain price.
  • Greylock - Mentioned as a firm that invested in Facebook and with whom the speaker spent significant time.
  • Harvey - Mentioned as a business that might see labor displacement due to technology.
  • Internal Revenue Service (IRS) - Mentioned in the context of hiring more people to combat tax fraud.
  • Instacart - Mentioned in relation to Pervert studying its history.
  • JPMorgan - Mentioned as a company whose executive team the speaker gave a talk to about AI.
  • KKR - Mentioned as a firm that, along with Blackstone, would compete to take a public company private.
  • Lending Club - Mentioned as a company founded by Renaud Laplanche.
  • Lotus 1-2-3 - Mentioned as a spreadsheet software that lost market share to Microsoft.
  • Meritech - Mentioned as a firm that invested in Facebook's Series B round.
  • Meta - Mentioned as a company where people get paid a fortune to stay.
  • Metaview - Mentioned as an AI company that helps high-performance teams in hiring.
  • Microsoft - Mentioned as an infrastructure layer player for PCs and as the company that Lotus 1-2-3 lost market share to.
  • Nvidia - Mentioned as a leading lab that partners with Turing.
  • OpenAI - Mentioned as a company where people get paid a fortune to stay, and as a competitor to 11 Labs.
  • Open Door - Mentioned as a company where Alex Rampell has led deals.
  • Oracle - Mentioned as a past Sequoia company.
  • Plaid - Mentioned as a company where Alex Rampell has led deals, and as a company the speaker missed investing in at Series B but corrected by investing in Series C.
  • PFF (Pro Football Focus) - Mentioned as a data source for player grading in the "BAD" example.
  • PeopleSoft - Mentioned in relation to Dave Duffield's hostile takeover.
  • Paypal - Mentioned as a company the speaker wanted to be a partner of, and with whom they discussed post-transactional products.
  • Relit - Mentioned as a company that raised a Series B shortly after its Series A, and as a company the speaker is on the board of.
  • Replitt - Mentioned as an organization that uses Metaview.
  • Ribbit - Mentioned as a firm that focuses on fintech and is a specialty.
  • Robinhood - Mentioned in relation to Vlad studying its history.
  • Salesforce - Mentioned as a company that might buy another company, and as a potential acquirer.
  • Salient - Mentioned as a market leader in outbound loan servicing for autos.
  • Sequoia - Mentioned as a firm whose companies once represented a significant portion of the Nasdaq's market cap.
  • Silicon Valley (show) - Mentioned as a show the speaker's kids have been watching.
  • Snb Bank - Mentioned as a company where Alex Rampell has led deals.
  • Standard Capital - Mentioned as a Y Combinator offshoot that might take 10% ownership.
  • Stripe - Mentioned as a company that the speaker passed on investing in at the seed round, and as an example of a company that worked due to new company creation.
  • Turing - Mentioned as a research accelerator focused on post-training reliability for agentic systems.
  • Trialpay - Mentioned as a company the speaker started, and as an example of a company that went through tough times.
  • Uber - Mentioned as a company that everyone wanted to invest in.
  • United Airlines - Mentioned as a company that might reallocate labor due to AI.
  • Vlex - Mentioned as a European company that bought legal records and added AI, growing significantly.
  • Visa - Mentioned as a company that wanted to buy Trialpay, and as a potential acquirer.
  • Visicalc - Mentioned as the first spreadsheet software, which lost market share over time.
  • Webvan - Mentioned as a company whose founders were met by Pervert at Instacart.
  • Workday - Mentioned as a company that has hostages, not customers, and as an example of software that is difficult to switch from.
  • Y Combinator - Mentioned as a prominent accelerator.

Tools & Software

  • Airtable - Mentioned as a platform that combines AI with a no-code system for data organization and decision-making.
  • ChatGPT - Mentioned as a tool that can be used to create logos and as an example of AI that can perform tasks.
  • Microsoft Office - Mentioned as the dominant software product for plaintiff attorneys before companies like Eve.
  • Netsuite - Mentioned as a company with hostages, not customers, and as an example of software that is difficult to switch from.
  • Software - Mentioned as a core component for modern companies to avoid being overtaken by competitors.
  • Zendesk - Mentioned as an example of software that could be significantly impacted by AI, potentially reducing the need for licenses.

Websites & Online Resources

  • metaview.ai - Mentioned as the website for Metaview, offering a free month of sourcing.
  • turing.com - Mentioned as the website for Turing, providing information on their research acceleration services.
  • www.airtable.com/20vc - Mentioned as the URL to unlock the true scale of workflows with Airtable.

Other Resources

  • AI - Mentioned as a technology that can perform hundreds of tasks and inform decisions.
  • Agency - Defined as the trait of people not being told what to do and taking matters into their own hands.
  • Call options - Mentioned as a financial instrument that venture capital firms buy, hoping they expire in the money.
  • Capital - Mentioned as one of the three things founders need to materialize.
  • Consensus deals - Mentioned as deals that are obvious and wanted by many investors.
  • Countermonies Christo - A motivation beyond financial gain, akin to revenge or redemption.

  • Customer acquisition - Mentioned as a potential use for credit funds.

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