Venture Capital Seizing the Intellectual High Ground
Something I have been noticing lately is how Venture Capital/Tech investing seems to have seized the intellectual high ground from other Private Equity/consulting and business industries. Historically I feel like PE/Consulting was the place that extremely smart people went to. But now reading the news and blogs like Stratechery, Exponential View etc. and looking at people like Ben Horowitz & Peter Thiel I feel like there are more smart people in this space than any other field at the moment, even if it is markedly similar to PE/Growth Equity.
I realize this may just be great PR and the media frenzy around Silicon Valley and just big buzzwords such as "Aggregation Theory" and "Abundance", but has anyone else noticed this? Also are there any parallel "Great Thinkers" on the PE and consulting side?
Agreed. From what I've found pre-crisis the best and brightest went into finance then post-crisis the best and brightest have matriculated to tech with some of the more business orientated individuals going to tech investing (VC / Growth).
I agree that most of the brilliant people I know have gone into the VC/Tech Investing side of finance post crisis. But even with more people joining VC I have seen more intellectual output in the VC industry than ever was in finance or PE prior. I am curious since it is at the ground level the same thing as PE/Growth Equity, investing money into businesses and them assisting with ops. What is the cause of the huge jump intellectual output from extremely similar industries?
I've been very underwhelmed by most of the VCs I've met and it's the opposite with the PE guys.
Will you please elaborate on the differences you observed?
Agreed
Median in PE is higher but VC seems to have a long right tail. Look at a sample of top UG students – of those who are absolutely brilliant, most seem to head towards VC/tech/entrepreneurship nowadays. We're talking cream of the crop kids at Stanford, Harvard, Yale, etc.
The guys going to IB PE consulting are your typical smart and hardworking students, diligent but conventional, they all somewhat fall short of the bar that makes a person seem truly exceptional.
The median in VC is lower bc there are randos.
This
Both investment strategies have smart people and top performers in both are whip sharp.
I think tech investing is perceived today as having the "intellectual high ground" because of the amount of media attention it commands and the willingness of the industry's participants to write so much (stratechery, avc, first round's blog, above the crowd, etc). In fact, content marketing and brand building is a key driver of deal flow in early stage investing so incumbents have an economic interest in blogging and tweeting. Contrast that with PE where the top shops almost uniformly stay quiet about their strategies, deals, etc.
Also, m_1 alluded that he's met much more impressive PE investors than VC. I think that's a function of "VC" having much lower barriers to entry than PE. Anyone can become an angel investor, and if they're good at networking, muscle their way into a city's startup ecosystem. There's also been a proliferation of micro seed funds the past 5 years. Many of these folks aren't particularly impressive, but there's a lot of them so you're more likely to run into someone like that (if you're playing in the seed / series A stage) than a GP at Sequoia who's a made man.
This! Most of VC is networking and who you know, less so what you know. I'm connected with many and while they are smart people do doubt, it's less of an emphasis on operational strategy working towards an exit. VCs truly provide only a few things: 1. Capital 2. Introductions 3. Recruiting 4. PR
Even though any early-stage VC you ask will tell you they're extremely excited about their recent investment in X, they know it likely won't work out. Regardless of any mission statement or whitepaper, it's much more of a spray and prays system. 1 investment out of 100 will return the fund and then some profit for the firm.
If you think about it, VC is one of the greatest schemes in finance today. Take into account the 2 and 20 rule - 2% management fees, 20% profit-fee. Add that up with long feedback loops and boom - you could have 10+ years of management fees to work with so long as you have a differentiated 'thesis' and a few standout portfolio companies.
Despite its flaws, personally, I think VC would be the greatest job in the world - speaking with incredibly intelligent folks who explain their business to you and let you ask dumb questions is awesome. At the early-stage it is difficult yet exciting considering the hustle, but all my friends love it.
I digress. Back to the topic at hand - VC is in the limelight - there's PR about it daily and the media can't get enough. I believe we're seeing higher than average fund TVPI because of this. Less acquisitive corporates and once unenthused consumers are now in the know becasue of this. However, while exits are increasing (or so they say), founders are realizing that they don't need the VC money. Especially at the later stages, it's easy to call a spade a spade. Founders have been pouring on capital, diluting their own %, and providing the need for higher and higher valuations for no reason.
In total, VC is a complex beast that might be a scheme. For context and the opportunity to make your own opinion, check out Backstage Capital, Social Capital, Lerer Hippeau, and 645 Ventures. Report back and tell me what you notice!
100% agree with both of you. I guess broken down like that Early stage VC is probably 50% building out "personal brands" to attract start ups and the other 50% is just throwing money at brilliant kids and hoping they can can ride a hype train to high valuations/exits. This explains why most VC firms I know of deliberately hire former bloggers/columnists such as Morgan Housel at Collab Fund as partners. A combination of media fawning and the brand building can put out an image of a "intellectual high ground". That being said I do think that VC has a certain allure to brilliant people since there is a perception of "changing the world".
I think that this is just an impression, tech allows people to disrupt industries quite easily. Sectoring VC from PE is completely stupid. You will meet people with completely different skillset. PE people tend to deeply understand a market, pricing, etc where as VC investors can scout executives that can create a company culture and fix a problem/find a gap in the market. Wait for a crisis in two years time. 75% of tech companies will be wipeout, same for new VC funds without a track record.
In regards to tech - very few are truly innovating, many are just apply what others have created to a new market, just like a consultant applies pricing principles to a business (ie from Commission/Sales based to Something-aaS based revenues).
There are few VC investing in Deep tech, I would say that yes these folks are some of the most interesting VCs as they know both the tech behind a market and the business side itself. I have no interest to speak to someone at Sequoia, saying they are smart is pretty dumb to me - they just get into the best rounds because they pay insane prices + startups want them on their board due to Sequoia's track record/name.
Coming back to flesh out my answer a little more, but in my opinion a lot of VCs are led by one-hit wonders and not people capable of delivering consistent results. Their valuation methodology makes little to no sense as well (I don't give a fuck how "binary" your outcomes are), and almost everyone I've met in the VC space, even at well known funds, isn't very impressive.
This has worked out well for me because I've been investing in startups, showing the founders how to rephrase everything to make it easy to sell to VCs, and then flipping stock to VCs at a 10x+ valuation off what we bought. I literally inserted like 10 buzzwords into a deck the other day with a founder then made a few intros to VCs I know and it's looking like another 10x+ lol. Stole this idea from the cuckbois at all these "incubators" you see. Y-Combinator is famous for dressing up and teaching "sales" to technical founders then flipping out to VCs at a stupid high valuation.
If you try that on PE guys though, they'll laugh you out of the room because they understand how valuation really works.
The most telling give for this is the Kauffman Foundation's report on VC returns. That says all you need to know really.
On the PE end, I've been really impressed by everyone's overall ability to learn quickly, their ridiculous work ethic that's ingrained in the industry, and how stupid granular some guys can get even when they have no business knowing certain things. One of the best conversations I've had about eComm was with a higher up at a small LMM PE fund...and he hadn't touched eComm in 5+ years yet was stupid tactical. Really impressive given his day to day has nothing to do with digital marketing.
Also...VCs and their belittling attitude and moral high ground bullshit. They always act like they're saving the world when they are no different from anyone else in finance. Not all VCs are like that of course, but I think most of you know what I mean. The guy in private equity doing distressed/turnaround deals and saving companies is doing work that's just important as investing in an app that makes cats on blockchain.
I'd actually love to hear more high-level commentary about this. Maybe not about whether VC has the "intellectual high ground," but where the top talent is flowing towards. One trend that I've seen in recent classes is the favoritism towards late-stage growth. I think the general reasoning is that you do similar types of work to PE (since late-stage generally entails similar levels of diligence as a PE), but you get to look at much more interesting companies (i.e. Slack / Uber instead of middle-market enterprise software companies).
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