Nominal stages (seed, A, B etc.) don’t really matter. Instead, the only important distinction is between risk and scale. Everything else is nomenclature and posturing along a gradient.
At risk capital stages, founders/companies test hypotheses with highly uncertain but important outcomes. You are either right or wrong with supralinear results on being right.
At growth stages, companies only have one important question: will my outputs increase proportionally with new inputs or “can I repeatedly turn dollars into growth efficiently?” Done well, that is a linear (often sublinear) equation.
Companies flip from early to late at different moments. You can see “early” companies at $100 million valuations/ millions of revenue and “late” companies that are pre-launch. What matters is that they are early or late to narratives, markets, themes, business types, founder profiles, etc.
If I’m right (and I think I am) then the typical distinctions of a seed fund basically become meaningless. What you really need to do is commit to being a risk-on early stage fund finding good risk/supralinear bets (where if you’re right, you’re right).
And because much of the world has been slow to this realization, there are certain gaps in the market that risk capital (true seed) funds can exploit:
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“Traction A’s” where a company has traction/revenue but is hard to comprehend or underwrite for scale investors. The mental model lags the traction.
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Pre-seed bets on truly novel ideas that require risking more time than capital. That bucks the business model of late/scale-oriented investors who need to operate their assembly line efficiently in an always-on win mode.
And there are certain honey traps that risk investors must avoid:
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Highly legible seeds at fulsome prices: when opportunities are too clearly good too early, they overprice to the point where risk capital can’t make money AND attract too much competition (potentially poisoning the well of the category). Capital and market competition kills returns for early risk underwriters.
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False flag traction/“de-risking”: revenue is often a leading indicator of value, hypothesis validation, and PMF instead of an output there. Empty calorie growth that either can’t sustain (not based on fundamental validation) or just isn’t important (bad categories) will kill you.
The world is going this way – that’s the big bet. The trades may change but the trends are long term and enduring.
Calling it a “generational divide” is a cheap shot BUT I wonder about the current/prior generation of GP’s ability, willingness, excitement to see that future and break from the past habits/reinvent themselves and their firms. The next great venture funds will be built on exploiting that.
I Read
Five Emerging VC Swimlanes – Gibner
I think the categorization here is wrong today and will probably be wrong tomorrow, at least around what he terms as inception funds. I think he also misses the early stage indexers that are very happy to be barnacles clinging to the side of the whales. But there’s some good stuff in it too. “Too big but not big enough” seems like the most brutal place to be.
Classical Risk vs. Quantum Risk – Kanyi Maqubela
“What if risk, as a function of milestones, looked less like classical mechanics, where there can be continuous, curve-like de-risking in time? What if all of the activity that comes along with building a company does not in fact de-risk it? What if product market-fit is in fact the only discrete state in the early stage that de-risks a company?”
One cool job
Hummingbird Ventures, a firm I super duper respect, is hiring an analyst in SF. To the extent that anyone who follows me/reads this is of the right age and demo you should absolutely apply. Hummingbird makes very early, very concentrated, very risk-on bets. They’re European and have had huge success going where others won’t and making EM bets. Just generally a firm that I admire and I think this will be a really cool job to learn venture from first principles for the right young person.
I Wrote
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Sam is totally wrong about equity comp. This turned into a whole thing. In the end, exhausting but I’m right. Incentives matter so how you pay people is just as important as how much.
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We should buy some old flash gaming domain(s) like miniclip or newgrounds and revive them to host vibe coded games. Fun idea and probably some real money to make.