Going Your Own Way

Defying Pattern Recognition of Venture Capital Managers

Follow the discussion on Twitter here

“We all need to remove the notion that what made us successful before will work today (and tomorrow)” — Defying Pattern Recognition of Venture Capital Managers

While most of the content for our recent 2023 Emerging Manager Circle Summit is off-the-record, one of our conversations with Bryce Roberts, co-founder of OATV and Indie.VC, really hit me and he’s granted me the privilege of sharing.

Our conversations centered on “Going Your Own Way,” highlighting fund managers who have broken away from the traditional “best practices” expected in venture capital. For those who haven’t raised their own fund, the process of starting an investment firm that does things differently than the pack is wildly difficult despite our industry’s adoration of contrarian behavior. Amidst raising Equal 1 (and even when I contemplated the possibility of the fund), we were told a litany of reasons why our fund would not work.

“You need to be from a top-tier firm to build a successful firm.”

“The best deals are only in the Bay Area.”

“You are too concentrated.”

“You need to be more specialized to break through in this market.”

These were some of the reasons that nearly 400 LPs passed on our first fund. These were extremely well-informed views by some of the most experienced LPs in the business, but ultimately we’ve defied a lot of these best practices, while adhering to a highly concentrated, thesis-driven approach across our 4 product domains (energy, insurance, supply chain and retail). The early results of that fund are promising (albeit still too early to tell) with all but 2 of those companies receiving mark-ups (13 out of 15) and 14 of the 15 being currently active.

Returning to Bryce, who was a founder of an incredibly successful seed-stage firm, OATV. OATV was amongst the earliest seed investment firms and had amazing success with early bets in Foursquare, Fastly and Figma (amongst others). In 2015, the firm made a decided effort to move away from its core model of seed investing and towards a new model, one they would later call Indie VC. Indie was counter to virtually every rule that LPs put in place, wanting to defy power law and focus on companies capable of generating capital efficient returns. When I asked Bryce, “If it isn’t broken, why fix it?” He replied back, “We all need to remove the notion that what made us successful before will work today (and tomorrow).” This is a powerful thought for an industry that relies some heavily on pattern recognition.

OATV had been an innovator in its own right as one of the first firms to move upstream to write seed stage checks amidst a time period when the costs of starting a company were falling and venture fund sizes were rising (those trends have remained pervasive for the last decade). That playbook, which was highly non-consensus at the time, turned out to work quite well. As the seed market evolved and became increasingly consensus (arguably too much so) with competition coming in from all sides, Bryce’s belief was that they needed to find new opportunities to invest, leading him to Indie. It would have been easy for OATV to continue on in the fashion that it had been operating and many managers make that choice, given the sunk cost of all the investment that they had in the structures that granted them initial success. Most rest on their laurels, accumulating fees as their model degrades, as evidenced by the turnover of venture capital firms over the last decades. Bryce recognized this and the need to continually push the envelope to maintain edge in the market.

Today’s emerging opportunities are different and the challenge in being uniquely capable in serving any existing consensus opportunity (especially as an emergent firm) is nearly impossible. To me, this solidifies that to do anything meaningful (at least in venture), you need to forge your own path, innovate in your own ways. At the very least, I know that were I to attempt to invest like other firms (and how the LPs who passed on us urged us to invest), it would not be successful or authentic to what I believe is in the best interests of our team, our founders and our LPs.

Those who know me best know that I’m a student of venture capital — I LOVE studying iconic firms and investors to learn from them the best I can. That said, I do think our approach to early-stage venture capital is wholly original. It borrows from lessons we’ve read, heard of, learned from iconic firms and investors, but equally as much from influences from outside the VC world like Carlota Perez, Charlie Munger, Bruce Greenwald and Michael Mauboussin. Our approach doesn’t fit a lot of the traditional venture models and some peers/LPs are shocked by how we spend our time and structure our firm. This structure (and the mental models and processes supporting it) rests on the belief that the existing methods of venture capital are not equipped for the next leg of the innovation cycle (what Carlota refers to as the Deployment Phase) and has brought us down a path more distinct than what we initially envisioned. Much like how firms like OATV approached the seed stage landscape before it was en vogue, we believe we see an emerging opportunity that others don’t and have positioned every aspect of our firm to be uniquely capable in executing on that thesis.

Did we “Go Our Own Way?” Yes, I have nearly 400 passes to prove it. Will it be successful? Only time will tell. In the meantime, I’m taking solace in the belief that our playbook is original and authentically our own. As we mature as a firm, we’re leaning in on our originality as much as we can, particularly around the “Prepared Mind.” As the market matures, I’m confident we’ll see others adopt these practices just as others adopted practices of firms like OATV. Folks like Bryce serve as a lasting reminder that the right to exist in our business requires a constant pursuit of innovation — the willingness to find comfort in discomfort. The second we lose sight of that, we sacrifice the entirety of the opportunity.

“If you desire to make a difference in the world, you must be different from the world.”

- Elaine Dalton.