Silicon Valley: from startup to fund and back

I have lived in Silicon Valley since the mid-90s. I came there during one of the early dot-com waves and was curiously observing its formative period. During this time, I saw all the power points of the Valley and went through all the stages from small startups to investment funds. And then, according to Hegel’s concept of new development, I returned to startups. I believe that the best training for a venture capitalist is to make your own startup, and the best training for a startup is to be a venture capitalist.

When you start making a startup, you think that it would be interesting to first invest in it yourself, that is, to look at it from the other side. And only after understanding the point of view of people who invest money, start creating your own startup.

You need to understand that in Silicon Valley, a successful entrepreneur is perceived 100 times better than a successful venture capitalist. They rank much higher than top venture investors.

However, if you are a young aspiring entrepreneur who is just getting started building your startup, you are lower than the VC segment. There are tens of thousands of people that are just launching their startups and there is nothing unique about it. The venture capitalist stratum is more interesting because it allows investors to look at thousands of startups.

I’ve seen about 2–3 thousand startups during 2 years of work at Andreessen Horowitz. Back then we called the deal flow within the fund a fire hose. We had so many deals that we had to hold partner meetings twice a week. And after seeing how this happens at the level of seed incubators like the Y Combinator, I wanted to observe the process at the “top” level.

My advice is to work in any position in a venture fund if you can and see how others do it before starting your first startup. That is, gain practical experience, learn all the lessons and only then go ahead and create your own startup.

The future of venture

Over time, venture capital will change, and the activities of AngelList and similar investments will simply turn into a verb, just like “to google”. There will be such a concept as “to AngelList” your idea.

There are changes currently happening in the venture capital market. After all, we have passed about 40% of the path that began around 2010. But we must understand that until now no one knows exactly how the venture works and whether its rules of the game will change in the future.

In Silicon Valley, everyone pushes for constant progress, and therefore there is no stability in the venture capital sector as all its structures are gradually being optimized. And the structure of modern venture capital formation is the concept of emergence

Now it costs $100 to launch a product, and two bearded hackers professionally write code without CEO control and colossal amounts of Series B. Previously, you had to get an MBA degree to fully understand all the processes in order to work in a venture fund. Now the opposite is true: business schools are studying startups to understand what happened to their favorite business and how they can avoid unemployment benefits.

All the decision-making power has shifted from traditional business to digital startups. They create the rules, and business schools copy them. In other words, if reality is reinvented every 10 years, then there is no school that can give you all the relevant knowledge in business.

In fact, Andreessen Horowitz was one of the first foundations that did not require an MBA to join, and they would much rather take someone who has created a successful startup.

At the moment, venture capital funds are focusing on bringing 50 genius partners together and giving advice on how to decide which startups are worth investing in. However, in the future, an expert group of professionals will gather for each industry of interest who will be able to assess startups. In this case, a professional expert will spend about 5 hours of their time a week on this and get the basis point of the fund, while not leaving their main job.

The world of personal startups

The world we are striving for is a place where each of us can be an employee of our startup in 20 years. For example, any blogger on the YouTube platform is a personal startup.

Thanks to technology, people no longer need support structures. Nor do they need to hire employees and pay salaries. All software for accounting, legal affairs and business development will be in the cloud. Therefore, a world with 3B entrepreneurs will not depend on the investments of 50 partners of one venture fund.

We will all be able to invest in one another. Therefore, now you need to invest your own money in those startups that you would like to see implemented in the near future. As a crypt anarchist, I will say that I prefer a world where a huge number of people receive some significant but not insane profit from their investments and return them to themselves, instead of 10 oligarchic venture fund investors receiving all the income from transactions.

The future of the venture capitalist

I believe we will all become venture capitalists. It’s just that investments will mutate slightly and change their format a little. So, for example, teenagers will gladly invest in the same PewDiePie or the podcaster Ninja instead of investing in a highly technological startup.

Imagine that a new podcaster gamer appears in the media space who needs $50 000 for equipment, promotion, etc., and they immediately show the structure of income distribution among potential investors. Thus, anyone interested will have the opportunity to invest in it as a startup.

Today we are heading towards civic investment today where everyone can invest in a startup. I really believe in it.

Why funds die

There’s an urgent problem of venture funds’ specialization. An average lifetime of a fund is about 10 years during which you need to exit and return the investment.

For example, specialization almost killed one of the first venture capital funds created by Kleiner Perkins when in the early 2000s investors at Sequoia Capital proclaimed that the future lies with solar energy.

The fund focused entirely on investing in alternative energy sources and as a result missed out on Uber, Facebook and other successful projects that have created the modern cloud Internet. Over time, specialization ceased to generate money, pension funds refused to cooperate and the fund had to change its investment focus.

It is very good if you got it right with the specialization. In case of failure you can skip trades in all related areas. Nobody will say which area will “shoot”. For example, now a trend has begun at BioTech that requires deep knowledge. It is impossible to become an expert in a week. Therefore, in my opinion, the movement towards specialization is an absolutely fading wave.

Historically, every model dies. Now venture capital funds have a rather careless life. Every year they receive 2% for maintenance and 20% return on investment — this model came to venture capitalism from Private Equity. And, naturally, funds have to protect their 2% to the last drop of investors’ blood.

In the future, of course, 20% of the profits will remain, but in general this model will cease to exist. Since smart people won’t pay just for the fact that investors read the Pitch deck, watch the traction and conclude where to invest money, it’s just not worth it.

Currently, the only advantage for large investors in a venture capital fund, that will also protect them in the future, is the availability to invest billions of dollars in a startup in the last round.

Competition for funds

The main task of the funds is to confirm that the 2% spent annually on their maintenance is totally justified. However, civil investors today are doing exactly the same thing as funds, thanks to the presented instruments in the form of AngelList.

AngelList is a category of software products that replace the entire hardware and software part of a venture office. It’s easier to pay a website $3 000 for a deal split between 20 people and not give 2% to anyone.

This platform creates what venture capitalists have feared their entire lives: competition. And venture capitalists have to be responsible for that same 2%. It’s a fact that in the entire history of Silicon Valley there were about 200–300 venture funds and only the Top 20 of them returned money to investors.

Scouting as a personal brand

Scouting was originally invented by Sequoia Capital. The value of scouting implies that a venture fund pays a small amount to young entrepreneurs to bring in promising startups.

As a rule, young talented entrepreneurs have been scouting in the fund for one or two years, after which they go to AngelList, show their syndicate and now these 20% that went to the fund go straight to them for deals.

How a startup can communicate with an investor

I always warn newbie founders not to send their updates to investors every week. Deliver only important news, as they are primarily interested in knowing what drives your startup forward.

Make the most of your investors: write specifically what you need. Constantly ask your investors for help so that each of them knows exactly what you want. After all, the worst thing that can happen is that they delete your email. But there will always be those same 5% of investors who will intersect with your expertise.