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The Apotheosis of Operator VC
Why we’re going to see a lot more of rounds like Front and what to make of it
The most recent round by Front, an email collaboration app, made a lot of waves: not for the $59m raise size or the $800m valuation but for who lead it. You see, Front’s Series C was led not by the usual suspects or even a VC firm at all. It was led by a consortium of operators. This has been described by many as “rare” or “surprising,” but I would argue this is the apotheosis of the operator VC model started by a16z a decade ago. I think it’s also more important than VC-land has been treating it.
The founder fetish
But first, a little history. Even though the current VC meme is “value-add,” that was the pitch of the original VCs too. Read Tom Nicholas’s VC: A History, especially Chapter 6, and you will be amazed at the lengths to which VCs helped build companies when the industry was in its infancy, including sometimes inventing some of the core technologies. They might as well have— VCs used to have much more skin in the game, sometimes taking over half the company in a single round.But this changed over time, and VCs got a reputation for being clueless MBAs who had never built companies themselves. This feud is perhaps best typified by the one-time spat between Marc Andreessen and Bill Gurley.
The state of venture capital prior to a16z was often this: a venture capitalist would provide funding for companies that were already showing traction. They would often replace the founders with a so-called “professional CEO” (that is, a greybeard), only let in peers who wouldn’t encroach on ownership targets, and try to hit an M&A event within a few years or, ideally, an IPO, which was more common prior to the Dotcom Bust. Look at old-school partners and you’ll see more experience at banks and consulting firms than at top startups for their day. You’ll also see a lot of MBAs from Ivy Leagues. Today, you’ll see a lot more leadership experience at top-tier startups (Uber and Pinterest seem popular). Firms trip over themselves to talk about how they’re in it for the long haul and how they will help you build your business.
Enter Andreessen and Horowitz. Their firm, a16z, blew up the standard VC model in several ways.The most nonobvious change was a preference for operators as partners — and, I would argue, the most consequential. If you look at their 2011 GP principles, this is the first requirement! And in fact, prior promoting the ungodly talent that is Connie Chan, for a long time this was the only way to become a real partner at a16z. It’s quite clear that this is a response to the above dynamics at play, where VCs became less and less useful to the point where Vinod Khosla asserted that most VCs add negative value (probably correctly). Other firms followed suit. This has become an important narrative for founders too. Nowadays, if you are not a former operator, you are at a disadvantage when competing for a round. This is a good thing. Operators bring a lot of empathy, valuable experience, and deep networks.
Why VCs? Where we go from here
This all sort of begs the question: is this desirable? And if it is, why should VCs even exist in the next 10 years?
If you’re an operator, why not just invest directly? We’ve been seeing more and more of this, especially as angel investing became a thing. As a result, operators have become more important in recent rounds. Look at 2019 alone. Cleo’s Series B was led by NEA, but most of the investors were other operators. Notion’s most recent round was all individuals, with no institutional money. New, interesting projects arose, like Operator Collective, a firm with mostly operator LPs. It went the other way too: Rahul Vora, the CEO of Superhuman, is raising his own fund while he is still CEO. For those paying attention, 2019 was the year when operators unaffiliated with a firm became increasingly visible.
Nonetheless, this is the natural progression of the process put in place by the a16z-triggered founder fetish. If founders have been trained to prefer founder partners, why not cut out the institutional middle man and have a consortium of domain-specific operators lead your round? They’ll be more useful anyways, freed from the shackles of institutional venture! At least, that’s the internal logic. As a founder, you might start thinking, why will I need a VC in five years?
Front blew everything up because leading a round is actually qualitatively different than just investing. It is not as simple as just getting some operators together: there is nontrivial work in forming a consortium that can actually lead the round, not just participate. The lead actually values the company, which is no trivial task. It also requires getting the practical work done, and there is a lot of invisible backend work and tribal knowledge that goes into leading a round and getting all the documents in place. On top of that, firms have large capital bases that can provide support and reduce search costs. As a result, this is something different than even an unusually late-stage angel round.
The skills of being a good VC are not the same as being a good founder, even though founders have a huge leg up in learning those skills. VC is the art of multitasking, support, and picking — none of which are skills you inherently develop as a founder because you are by definition focused on a single company (yours). For many of the most important things that VCs do, like managing boards and running rounds, for founders it is often n=1.They know how to manage their board. That doesn’t mean they know how to help you manage any board. Ultimately, I think there is something to Ronald Coase’s theory of the firm, and the transaction costs of cobbling together a group of operators are real, and the value of firms that specialize in venture is too. Plus, this can go too far where an operator is spending more time on their investing than on their main company, hurting everyone in the process. But, as the meme goes, you make money by bundling and unbundling, and the past 10 years has seen a lot of bundling of operators into VC firms.
A few predictions of where we go from here:
This is not the last founder-consortium led round. There might even be another about to be announced. But the operators who do this won’t do it often and will mostly write angel checks.
Value-add will become a much more intense meme to counteract this threat. Ironically, expect institutional VCs, who have lots of fee money, to lead the way.
VCs will stick around because, even though they may not always be the best businesspeople, there are real VC skills.
Nonetheless, founders will start to figure out how to institutionalize being non-institutional. Much of the dark arts will become public, and some will be shared through firms that service founder consortiums. Rails will be built.
VCs will respond by finding ways to get more founders into their dealflow and as part of their firms in one-off or limited arrangements.
There will be a round in the next 3 years where an institutional VC brings in a one-off founder who takes their lead board seat instead of the partner. This might become popular.
This also comes from the leverage VCs had when capital was more scarce than today.
I maintain that, even though a16z was prescient, almost all of its innovations were inevitable. Probably the three biggest other changes were the lack of price sensitivity, the media empire, and the agency model. The lack of price sensitivity is an obvious response to the increase in size in the tech market and overabundant liquidity. The media empire was likely inevitable in our hypermedia age, especially as the proliferation of other funds was inevitable with this much capital — you need to be seen and compete for dealflow somehow. The agency model is somewhat surprising, but value-add was inevitable when capital became cheap as a differentiator, and the agency model is a somewhat predictable variation of this. It’s a way to turn a VC firm into a continual accelerator, which is sort of an agency model.
Many firms are now hiring partners from their own prior deals. I suppose one sort of implicit advantage this gives top VC firms is that it attracts even better founders because they know that there is a possible job at a Tier 1 waiting at the end of their journey.
Clearly, many founders can learn this, but the assumption that being a founder implies being a good partner is wrong. Obviously, being a VC also does not imply being a good partner either.