A venture capital firm looks back on changing industry norms, from board seats to backing rival startups | TechCrunch

Last month, a well-known Bay Area early-stage venture capital firm, Uncork Capitalcelebrated its 20th anniversary with a party at a renovated church in San Francisco’s SoMa neighborhood, where 420 guests gathered to celebrate, exchange tips and share war stories that helped the firm grow.

There’s no doubt that the venture landscape has changed considerably since Unqork’s inception. When firm founder Jeff Clavier started the firm, he was using most of his own savings to write six-digit checks to founders. Now Clavier and his contemporaries — including First Round Capital’s Josh Kopelman and Felicis’ Aydin Senkut — collectively oversee billions of dollars in assets. Zooming out, the entire industry has gotten much bigger. In 2004, venture firms invested roughly $20 billion in startups. In 2021, that amount reached a comparatively staggering $350 billion.

As the scale of the industry has changed, many of the rules of the road have changed as well – some for better, some for worse, and some because the original rules didn’t make much sense to begin with. On the eve of Uncork’s anniversary, we spoke with Clavier and his managing partner of many years, Andy McLaughlin, about those changes.

At some point, it became perfectly acceptable for full-time VCs to invest their own money in startups that go public. Previously, the institutions funding venture firms wanted partners to focus solely on investing for the firm. Do you remember when things changed?

JC: Firms typically have policies against allowing partners to invest in things that are not competitive or that do not fit the firm’s strategy. Let’s say you have a friend who starts a company and needs cash; if ever the firm decides to invest in a future round, two things will happen: A disclosure is required [the firm’s limited partner advisory committee] Saying ‘For your information, I was an investor in this company, I am not the principal, I did not price the deal, there is nothing strange in me marking myself out here.’ Also, some companies [force] You will be allowed to sell investments during this round so that you do not have any conflict of interests.

So then, when did it become acceptable to support competing companies? I guess it’s still not acceptable In encompassing manner it is accepted, but it more is ok That’s a lot more than it used to be. I spoke to an investor this week who has led later-stage deals with very direct HR competitors. Both companies say it’s fine, but I can’t help thinking there’s something fishy about this picture.

AM: They’re probably behaving as if it’s okay and they’ll continue to do that until it’s not okay, and then it becomes a bigger problem. This is something we take very seriously. If we think there’s a potential conflict, we want to get ahead of it. We typically say to our own portfolio company, ‘Hey, look, we’re looking at this thing. Do you see this as competitive?’ We actually had this come up this week. We think it actually is. [a] Very different [type of company]But we wanted to go through all the steps and make everyone feel comfortable.

Frankly, if a company goes out to raise a Series A loan, I would never allow them to talk to a firm that has a competing investment. I think the risk of information leaking is too great.

Perhaps this particular situation highlights how little control founders have right now. Maybe VCs can get away with backing competing investments right now, whereas at another time, they couldn’t.

AM: There aren’t a lot of late-stage deals happening, so maybe the founder had to accept it because the deal was too good to pass up. There are always so many dynamics going on, it’s hard to know what’s going on behind the scenes, but this is something that makes me personally very uncomfortable.

Another shift focuses on board seats, which were long seen as a way to underscore a firm’s value to — or investment in — a startup. But some VCs have become very vocal supporters don’t take themHe argued that investors could get better information about companies in between board meetings.

JC: You actually have a moral duty to pay attention and help, so I find this statement ridiculous. I’m sorry. It’s our job to help companies. If you have a large stake in the business, it’s your job and your responsibility [to be active on the board],

AM: A bad board member can be a useless burden on the business. But we’ve been really lucky to work with really amazing board members who have joined Series A and B and C, and we just see what an incredible impact they can have. For us, if we form a board at the seed stage, we’ll take a board seat if needed and we’ll stay until Series B and we’ll step aside at that point to give our seat to someone else, because the value we can provide from that zero to one stage is very different than what a company needs that’s going from $10 million to $50 million to $100 million. [in annual revenue]We still like to be in the room as an observer; we want to be very close to the companies. But ultimately, the same way a CEO should think about upgrading his executive team as the company matures, the same thing is true for a company board. Board seats are still really important for companies that need guidance.

With exits in the market being somewhat restricted, do you think you will remain on the board for a long time, and will this restrict your ability to join other companies?

AM: This is probably less about exits and more about later-stage funding. If companies are not raising Series B and C, then yes, we will be on those boards for a long time. This is a result of the current state of the funding market, but we are seeing things getting back on track.

The second thing that happened was during a crazy time [of recent years]We find that these late-stage crossover funds will be leading Series B or maybe Series A, but they’ll say, ‘Look, we don’t take board seats.’ So as a seed investor, we had to stay for a long time. Now that those same firms aren’t doing those deals and more traditional firms are backing Series A and B rounds, they’re taking those seats again.

Andy, we talked about it. the last summerWhen there was still a lot of money flowing in seed rounds. At that time, you predicted a contraction in 2024. Has that happened?

AM: There are still a lot of seed funds out there, but a lot of them are getting towards the end of the fund cycle, and they’re going to think about raising funds. I think a lot of people have realized that they don’t know a lot about this. [of them] The sources of capital that were very willing to give them cash in 2021 or 2022 — a lot of that is gone. If you were raising money primarily from high-net-worth individuals — like non-institutional LPs — it’s going to be really hard. So I think the number of active seed funds in North America will go from, say, 2,500 today to, say, 1,500. I’m sure we’ll lose 1,000 in the next couple of years.

Despite the boom in the market?

AM: The market may be doing well, but people are not seeing a lot of liquidity, and even high net worth individuals have a limited amount of cash they can put to work. Until we see real cash coming back – beyond highlights here and there – it’s going to remain difficult.

How do you feel about this AI wave and are the prices rational?

JC: too much pricing is taking place, and [investing giant amounts] That’s not what we do at Unqork. A big seed round for us is like $5 million or $6 million. We could raise $10 million ourselves, but that would be the maximum. So everybody is trying to figure out what investment makes sense, and how thick a layer of functionality and proprietary data do you need to have to avoid getting crushed by the next generation [large language model that OpenAI or another rival releases],

AM: People are getting confused about what AI means and almost forgetting that we’re ultimately still investing in businesses that need to be big and profitable over the long term. It’s easy to say, ‘Look, we’re going to hedge this and maybe we can find a place to sell this business,’ but honestly, a lot of enterprise AI budgets are still small. Companies are dipping their toe in the water. They might spend $100,000 here or there [proof of concept]But today it’s very unclear how much they’re going to spend, so we have to look for businesses that we think can be sustainable. The fundamentals of what we’re doing haven’t changed.