Hacking Venture Capital
what r/wallstreetbets says about the future of VC
Crowds are cooperating intelligently (and stupidly) online to move financial markets. We are meme-ing things into existence. People have found the cheat codes and they are hacking capitalism.
But we should think long term. We should focus on doing this in ways that increase productivity, create new jobs and solve hard 21st century problems.
This would be far more useful than investing in a zero sum game of roulette at the world’s biggest casino. Otherwise the house always wins in the end.
We should hack venture capital
I firmly believe the future of VC is collaborative and social. It will be driven by a blend of investors and creators. By “creator”, I mean founder, operator, expert, thinker, tinkerer, academic - really anyone smart who isn’t a VC right now, and probably doesn’t even angel invest because they don’t have enough money to write $25k cheques.
Done right, hacking VC will mean more investment from and into women, people from working class backgrounds and underrepresented minorities. It will mean more investment into overlooked companies in far flung corners of the earth. It will mean unlocking pockets of value that are currently sitting unleveraged and unloved, and it will mean improving the balance of wealth distribution.
Why will it work? Because it is what the internet has done to every other industry:
VC is not a zero-sum game, like the public markets. It is already highly participatory, network-driven and collaborative by design. It’s perfect for this.
However, to hack venture capital, New Power needs to be harnessed in the right way…
We’ve tried this already! Equity crowdfunding has let everyday people invest in venture in Europe for 10+ years.
I worked at Crowdcube (a UK platform that pioneered the space) for 2 years. I believe passionately in the mission, and the team are fantastic. But let’s call a spade a spade… it’s still not really delivering on the promise of “democratising” VC - at least not for the people ponying up the cash.
Here’s the issue: all the power law returns in venture come from the top 5% of deals. You need access to them to win. Crowdfunding doesn't really solve this - the crowd are usually accessing the stuff angels and VC’s have already passed on.
On top of this, as brokers, there is no incentive for crowdfunding platforms to think about long-term success, portfolio management, exits, etc.
This results in what VC’s call “adverse selection” - extremely poor returns by design…
AngelList is doing a somewhat better job of this in the US with syndicates and rolling funds led by experienced investors / operators (who get access to quality, improving success probability). But non high net worths haven’t historically been able to access these sorts of vehicles (winds of change are afoot, which is very positive).
The thing is, we’ve been focusing on the wrong things.
All of the current solutions share one problematic characteristic…
They focus on driving transactions, rather than building relationships.
You see, a VC firm isn't a transactional platform. It’s a tight-knit group of smart individuals making educated guesses about the future, held together by a strong brand and backed by a wall of money. Good VC’s are also master nodes in powerful networks of other similar groups. They're able to help you raise your next round of follow-on funding from their mate further down the value stream. They’re able to open doors at C level in large organisations to land founders their next customer or partnership. They can help you make that engineering hire you desperately need. They can get you out of a tight spot with some sage advice.
Provided you’ve got the minerals, VC’s help turn your startup’s success into a self fulfilling prophecy fuelled by money, belief, relationships and network effects.
To hack VC, you have to hack all of this. You need to give your crowd of investors better tools to collaborate, to think together, to pool knowledge and resource, to connect and to learn. In the words of Packy McCormick, you need to conjure scenius. If you do this, a crowd of small ticket LP’s can become a powerhouse, a mission-driven army finding, backing and helping to build every portfolio company you invest in.
This is what Wallstreetbets for the private market will look like.
Over the next 10 years, a lot of investment organisations - both new and old - will try to bring together the ingredients of this delicious recipe and hack venture capital.
It's going to be a hell of a lot of fun.
Here's some stuff I think will be useful for would-be codebreakers…
An open source playbook for hacking venture capital
Caveat: I spent two years working in equity crowdfunding and 9 months working in corporate venture. There is a pretty good chance I don’t know what the hell I’m talking about here. However, my gut tells me I’m right.
Only time will tell.
The optimal future solution(s) will look more like social networks than two sided marketplaces.
Something between a social network and a traditional VC firm is what is needed to hack venture capital. It should be social / community-oriented, because VC is a network-heavy business, and because network effects (duh). This is already happening at small scale, but the VC hackers of the future will focus much more on social. They will have huge online networks that they can access to carry out sourcing and DD at scale.
AngelList, to a large extent, has already nailed this - they have hundreds of thousands of users and $2.5B in AUM. They own 5% deal carry on pretty much all of it. But I think they are just the pioneer, and many more players and models will evolve. With time both newcomers and incumbents in the venture game will become more social, at scale.
Incentives need to be aligned: carry > cash
The traditional carried interest / management fee model exists for a reason. It is much better than brokerage (which is how most crowdfunding platforms currently make money) because it forces participants to play long-term games. This is how you build startups:
There needs to be a decision-making hierarchy
You can play around with the decision making model, but ultimately authority figures in the community with experience, expertise, track record of good judgement, etc. need to be able to pull the trigger quickly or say no on behalf of everyone. This will allow your crew of would-be-VC-autists to ditch bad deals and access the good ones. Again, AngelList took a smart approach with syndicates (as did SyndicateRoom in the UK).
Rolling funds are even better. A fund model is superior because you avoid herding cats and optimise decision-making speed.
However, there is still room for improvement. In an ideal community-driven model, leaders need to be comfortable giving up the final decision on an investment to a different person, depending on the deal. Smarter people in the community who better understand the investment in question should make the decision, not senior authority figures (who decide just because they are senior). See how Ray Dalio runs things at Bridgewater.
There’s actually not really much point giving every Tom Dick and Harry access.
This is a key difference vs. the public markets, and is probably more of a personal opinion. As I’ve said before VC is to a large extent a marketing game. Your brand is important. Venture is unique as a financial asset class because the seller of the asset (the founder) cares who the buyer is (you and your posse of LP’s big and small).
Quality founders want value-add investors. To compete with top-tier funds, your LP’s need to add value that their LP’s don’t. This means your ragtag band of diamond hands need to be top quality. You can still be inclusive and should push to find the diversity of thought that comes with more women, working class, people of colour and other minorities - but they still need to be smart people, preferably who understand tech and have hustle, network, etc. Otherwise they are useful only for the cash in their wallets, and you might as well take a larger ticket from a pension fund, family office etc.
The wisdom of the crowd must be leveraged at scale.
If you are selective, you end up with a Swiss army knife of smartypants who help out on sourcing, DD and post-investment support (i.e. dogfooding of portfolio companies and connecting them with potential customers, advisors, follow on investors, etc.).
I’ve written previously about the promise of collective intelligence, and we’re designing the Odin platform with this in mind. In essence, if you source good deals and make good DD inputs on Odin, you will be rewarded. It was nice to see Sifted write about this subject last week. They’ll write one about Odin soon.
Data is king
You can automate the Andreessen analyst to take care of some of this. You need to think about collecting as much data as possible to complement your people-powered sourcing engine by building lots of web scraping tools, or buying data from providers like Specter, PitchBook, CBInsights, Dealroom, etc. By combining human intelligence and web-scraped data, you can limit guesswork and maximise objectivity in your investment decisions.
Counter-intuitively, you should probably maximise transparency and deal sharing.
You have to zag when others zig. It’s about getting good founders as much exposure as possible to as many VC’s as possible, and using this to earn deal access. Proprietary deal flow is dead. You need to be helpful to win deals.
It’s especially useful to do this in developing ecosystems with low connectivity like Europe, because the market is so inefficient, slow moving and full of shysters that you will drive your own success the more you share:
If you have your doubts about this, think about the difference between Old Power and New Power:
“Old power works like a currency. It is held by few. Once gained, it is jealously guarded and the powerful have a substantial store of it to spend. It is closed, inaccessible, and leader-driven. It downloads, and it captures. New power operates differently, like a current. It is made by many. It is open, participatory, and peer-driven. It uploads, and it distributes. Like water or electricity, it’s most forceful when it surges. The goal with new power is not to hoard it but to channel it.”
This is a big opportunity for startup funds. Most incumbent VC’s won’t be willing to drive a transparent, efficient market. They’re Old Power, you see. They benefit from the current paradigm too much to change. The good ones see 80% or more of the good deals already, and the bad ones are basically snakes who will die out as an ecosystem scales (they are still pretty common in developing ecosystems like the UK):
You still need need to leverage Old Power
There are two reasons this is important:
Founder availability bias - big brand VC’s accessed good deals in the past, meaning they got more exits, meaning they attract better founders, meaning they access all the best deals now. This means a small number of funds tend to consistently get a good slice of the returns.
Signalling and driving follow on rounds - if you’re a “New Power” VC and co-invest with the old guard, you basically ride their coat tails and get in on what Chamath calls the Silicon Valley ponzi scheme.
It’s pretty difficult to help portfolio founders succeed without these things. You need good relationships with other VC firms.
One of the problems I always suspected we suffered from at Crowdcube was negative signalling - even if we found a great deal, people would think less of it precisely because it was on Crowdcube. This reduced the founders’ probability of raising follow-on funding. I think this is changing, but I sense that it is still an issue.
The true winners in the new world of VC will probably combine Old Power and New Power.
Think about it this way - as soon as Sequoia, a16z, Benchmark, Founders Fund, etc. launch some kind of way for tons of value-add creators to co-invest in their deals and/or funds, everyone else trying to do this is probably pretty f*cked.
But I think we’ve got a while before that starts, and there will be some big winners along the way.
It's going to be a wild ride. Buckle up for the hacking of venture capital.
This sounds exciting - how do I get involved?
Sign up for Odin (if you haven’t already). We are building the social layer for the coming revolution. We’re aiming to join the dots between the hackers and investing as a community at pre-seed and seed.
We are still working on our beta platform. For now, we're connecting with selected early members through Slack, Notion and a bunch of other no-code tools. If you want early access, drop me an email.
If you’re an institutional investor, family office or an incumbent GP who recognises where things are headed and would like to have a chat, feel free to get in touch.
I also recommend you sign up for a platform like Seedrs / Crowdcube in Europe or AngelList / Republic in the US, to get a feel for what’s out there and cut your teeth. I suggest you only invest in a fund or in deals backed by quality VC’s and angels. This is a de-risked approach.