The Complete Investor
The rise of the full stack VC model
Venture capital is fundamentally changing its business model for the biggest firms. Some, like Andreessen Horowitz, are becoming more operationally intensive. Some, like Founders Fund, are raising several big funds across every stage. Most notably and recently, Sequoia announced in a memo that Sequoia is restructuring completely.
This is the rise of the full-stack VC.
Full-stack VCs are a currently-rare structure where VCs raise lots of money, invest across every stage, are free to invest in many types of assets like secondaries or tokens, and (usually) employ more staff to help their portfolio companies.
Why do LPs want this? Primarily, it is because venture is the best performing asset class and tech is the best performing sector of public markets.
Why do VCs want this? Good startups are staying private longer, necessitating all-stage investing; much of value accrual is now outside of preferred stock; and deals are more competitive than ever.
The upshot is a significant increase in the complexity of the finance of technology. VCs are responding by becoming full-stack. It is the biggest change in VC since the creation of the field1 and it is going to transform the tech industry along with it.
The full-stack VC model
Venture capital has not innovated as much as the tech industry itself (though the common refrain that venture hasn’t innovated at all is wrong). The simple reason is regulation. Venture capital exists under a very narrow set of SEC exemptions that allow them to avoid the costly regulation that would normally accompany their line of work. The mundane reason is that, until recently, there haven’t been many VCs, and competition is the mother of innovation.
But there is also a deeper reason. The tech industry trades off business model simplicity to enable technology and product innovation. Compared to other sectors of business, the tech industry is relatively simple and sometimes even unsophisticated. As tech more deeply penetrates society, and as companies stay private way longer, this is no longer tenable because the increase in complexity means a need for more types of finance.
The response to all of these things is the full-stack venture capital model. Roughly put, the idea is not just investing across all stages but several asset classes while taking on more operational and financial complexity.
The core concept revolves around the idea that companies now engage in many financial operations beyond primary venture financing, which itself is now occurring much more in the lifetime of a company (requiring investing in all stages to avoid being diluted into oblivion). But companies are now embracing secondary sales and token sales, and they are now starting to look at bonds, factored loans, and more. Because full stack VCs already have relationships with the best startups and understand them well they are also in a strong position to offer such financing.2 It’s also impossible to not mention crypto here. The lesson for tech investors is that they may spot great opportunities to invest in technologies that don’t involve buying preferred stock and they must be able to do so.
Full-stack VCs have a number of different strategies depending on which part of the financial stack they want to attack. Andreessen Horowitz has a wide range of specialized funds like crypto and bio and is particularly focused on buying tokens. Sequoia is focusing primarily on full-lifecycle support and holding its investments basically forever. Iconiq invests heavily in other assets related to tech, like real estate. Most interestingly, General Catalyst is focusing on alternate financing methods, including a credit fund similar to Pipe.3 Over time more funds will compete with them and offer more financial products, like pure debt underwriting or ETFs or maybe even insurance, and invest in more assets directly. By freeing themselves of their previous SEC restrictions, full-stack VCs will also be able to engage in far more complex financing themselves (for example, most VC funds cannot take on leverage).
Full stack VC has a preliminary stage that seems similar but is actually distinct: the all-stage investor. These are funds like Founders Fund, DCVC, Lightspeed, and more who have raised mega-funds or several funds to cover companies in any stage, often doubling down or leading successive rounds in existing portfolio companies or at least maintaining ownership targets across what is now a very long company lifecycle. Some firms, like Benchmark and Homebrew, have fought valiantly against being all-stage despite doing well in order to keep their focus, partially through opportunity vehicles.4
While all full stack VCs are all-stage, not all all-stage VCs are full stack. All-stage VCs are still traditional investors, so they can only invest in primary equity rounds. Full stack is defined by its ability to invest across asset classes. Also in contrast, many all-stage funds are relatively lean compared to full-stack VCs. Plus some tech companies interact with regular PE funds and when they go public or need debt interact almost exclusively with traditional financing companies. In other words, as tech has scaled, its financing universe has remained highly sporadic.
Full-stack VCs are breaking through walls that they have hit against as VC hits its scale limits. Lots of the returns in tech are outside of venture capital, even for portfolio companies. Take Sequoia, which has recently5 had several portfolio companies whose public performance outclassed Sequoia’s private investment,6 like Square, which is specifically mentioned in the memo and returned 41x post-IPO against Sequoia’s 14.5x return upon IPO. For companies like Andreessen Horowitz, who backed Coinbase early on, they would have returned twice as much just buying Bitcoin directly.
The full stack model is more operationally intensive. In addition to higher compliance costs, operating across more asset classes requires more staff to understand and execute those operations.7 There is also competition to offer more support from full-stack VCs because founders now expect more from the best investors, so the ante is up for full-stack VCs to earn a cap table spot.8
Being broad-based has one other interesting implication: scale. It is a direct repudiation of the common wisdom that “venture doesn’t scale.” While many, most notably Sam Lessin, has talked about these advantages, many others come to mind, including: easier international expansion; attracting a wider investment base; investing in other feeder funds, especially for departing GPs; more lobbying clout on behalf of portfolio companies; opening up of direct asset financing opportunities and asset-heavy opportunities; commoditization of back office support; and cheaper financing from a broader asset base, among many more. Scale is good for tech companies and it will probably prove to be good for tech investors too.
The future of VC: where does everyone fit?
To simplify, we can think of VC as splitting among two directions: specialized vs polymaths, and value-add vs “just take my money and run.” These characteristics are as follows:
Specialized funds have a focus. Three key methods of specialization are: focusing on a certain stage, focusing on a certain vertical or sector, or focusing on a certain strategy.
Polymaths have a broad focus. For the most part, they are cross-stage. Increasingly, they also invest across asset classes and the private-public divide, but not necessarily.
Value-add investors bring value other than money.9 Sometimes it is something specific, like solving a certain set of problems through direct work; sometimes it is just connections and advice.
Just take my money and run investors know that cash is green. They just give money and get out of the way. This is relative, since even passive VCs still often at least provide introductions and advice.
Below is a graph of where some firms sit with representative classes for many types of firms. The top right corner is where full-stack investors live, though some great all-stage investors live there too.
The obvious question is: what room is there for new entrants? VC fundraising is at an all time high, but since 2018 new fund formation has fallen off a cliff, below even 2010. Full stack VCs keep upping the ante and can keep funding their best companies over and over, and specialist funds keep getting better and better. There is increasingly less white space. But new funds are a critical part of the venture ecosystem, so it is in the best interest of full-stack funds to nurture this part of the ecosystem. Expect to see much more investment in VC funds by full-stack VCs, perhaps even supplanting some of the best fund-of-funds.
Full-stack VC investing opens up two deep, interesting questions.
First, full-stack VCs are the first to take “investing in tech” as a universal concept seriously. Typically, LPs think about investing as occupying a certain risk-reward profile. As a result, they allocate their funds based on the expected blended return. Full-stack VC blows up this model because it is not purely “venture” as previously defined and therefore theoretically has a different risk profile; truthfully, we should call these new beasts full-stack tech investors. If tech is now an asset class in itself, LPs will eventually start asking questions about which sleeve the full-stack VCs should draw from. It also will call into question the expertise that full-stack VCs need because they will begin engaging in complex transactions that involve significant execution risk. Full-stack VCs will probably start asking themselves questions about where they belong, too, like whether they should still support the NVCA and whether they will professionalize. While the conversation right now is mostly about the advantages of being broad-based asset managers, there are disadvantages too: it could make VCs too comfortable and reduce their ultimate rates of return, which is what has made VC so attractive in the first place.10
Second, as full-stack VCs get more complicated, tech might as well. Tech financing is simple: remember, Silicon Valley has thus far traded business innovation for product and technology innovation, but outside of tech there is a lot of complexity, especially in terms of operations, finance, and legal. If software truly eats the world, you are what you eat, which will ultimately mean more complexity in what tech companies and their investors do. Software is no longer a cottage industry, and so it may evolve beyond paleolithic finance because venture investors will finally be in a position to offer it just as the industry is becoming mature enough to digest it. By adding additional degrees of freedom to business success, there are opportunities for tech companies to emerge that do not need technical innovation to succeed, which would change the complexion of all of tech to look more like other industries.
Whichever way it goes, no one can say venture is a sleepy industry today; it is just now birthing a whole new flavor of offerings. Full-stack VCs are really full-stack investors in tech as a whole, and their mere existence is primarily a testament to how much it has scaled. Tech is now so big it won’t even fit the same finance.
A lot of people have seen this trend and mentioned that this looks like VC turning into private equity. But that is not the PE business model. PE firms buy a majority of a firm, sometimes but not always struggling or distressed, and bring in operational expertise, often replacing senior management. That doesn’t sound like VC today, or where it’s going. But it does sound a lot like the early days. Remember, before Zuck found his Sheryl, Eric Schmidt was brought in to give Sergei and Larry “adult supervision”.
Roblox, for example, just raise $1 billion of debt. Why shouldn’t Greylock, which led the Series F, underwrite that?
This became very obvious when Ken Chenault, formerly CEO of American Express, moved to GC.
This is partially informed by the experience of Kleiner Perkins, which was very early to the all-stage game. But they struggled and ultimately split in two specialized firms.
There are lots of companies for which this is true from before the Dotcom Bust, but remember that companies used to go public at much lower valuations, so they are not relevant for our analysis.
Zoom returned 9x its IPO value in just 2 years (18x at its pandemic peak), the same as Sequoia’s Series D return; and Google is worth 81x its IPO value compared to Sequoia’s estimated 160x pre-IPO, (put another way, the best venture bet ever was only 2x better than post-IPO). This is not unique to Sequoia, though. Shopify is worth 80x its IPO price. That is a better than the Series A return of 47x. Note that VC returns are not at the moment of IPO so actual distributions will vary from these calculations.
An interesting technical note: full-stack VCs are all RIAs. This essentially allows VCs to trade flexibility for compliance cost. Under the Investment Advisors Act, venture capital firms would normally have to register with the SEC because they clearly meet the RIA definition, but they are exempt under a carve-out. The venture capital exemption to SEC registration is an important tool to lower the barrier of entry for funds because it allows firms that are pure VCs to avoid heavy compliance costs. Interestingly, some very big funds one might expect to have withdrawn their exemption have not yet done so. Notably, being an RIA does not imply being full-stack. Foundry Group is an RIA, but they seem to have mostly done so to invest in a lot of other funds.
Even YC, which tries to be lean, has 77 listed staff of which only 15 are investors. Some big VCs have more operational staff than are listed on their website.
The existence of this value is hotly debated, but I will ignore that debate . Some investors are clearly more helpful than others, and the point here is to talk about specific value-add.
One big concern many companies will have: if full-stack VC firms can hold portfolio shares forever, does that mean they will never be able to fund a competitor? Will founders want to take investment from a firm with billions of stock in a public competitor?