TweetStorm: The Venture Capital Halo

Posted March 5, 2016

A great thread on Twitter among Robin Hanson (@robinhanson), Marc Andreesen (@pmarca), Matt Wensig (@mattwensing) and Naval Ravikant (@naval):

@robinhanson: VC is dominated by a few firms. What is the scale economy? Few geniuses? Info of seeing most pitches? Ability to create new fashions? Other?

@pmarca: Core dynamic: A few firms have positive selection on their side; the other firms have adverse selection working against them. The battle among VC firms is less “who is smarter?” than “who do the best founders approach first”? The main historical driver of positive selection is prior success: a halo branding effect that new startups seek.

@robinhanson: But WHY does a firm look better by getting funding from top VC? Do such VCs really make better choices on average?

@pmarca: The startup is engaged in a war for employees, customers, and future investors. Top VC brand halo helps with all three. In essence, a new startup uses its VC’s brand as a credibility bridge until the startup establishes its own brand.

@robinhanson: Sure, but the question is why some VC brands shine brighter. Their money isn’t any more green.

@pmarca: They have an aura of success as a consequence of having previously funded successful startups. You walk into Sequoia, the walls are covered with posters from Apple, Oracle, Cisco, Google (all Sequoia funded). There it is. Arguably these dynamics are changing in real time in some interesting ways:

Change 1: Entrepreneurs are far more networked with one another now vs before; actual VC behavior may now be more important.

Change 2: Some VC firms (e.g. mine) believe we have created new and differentiated ways to actively help our startups succeed.

Change 3: There are new funding alternatives that didn’t used to exist – seed funds, crowdfunding, AngelList, etc.

@naval:  Change 3.5: Entrepreneurs are picking up their brands earlier – YC, AngelPad, NFX. Positive selection bias towards branded VCs has not gone away – but the branded VCs are having to pay higher prices.

@pmarca: Unclear. Alternate view is seed is new Series A, Series A is new Series B, and so forth. Adjust pricing accordingly.

@mattwensing:  yes; we’ve raised $2.9m in Seed; VC’s have already had Freudian slips by calling our next round “your Series B”

@pmarca: It’s not a Freudian slip :-). That’s how they’re actually evaluating you!

@mattwensing:  were startups expected to nail P/M fit before raising a Series A in the ancient world of 5-10 years ago?

@pmarca: No, because 5-10 years ago a Series A was $3-5M.

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