Engineering Outcomes: How Silicon Valley is becoming more like Wall Street (in a Good Way)

Quoting the brilliant Silicon Valley operator David Sacks: Activist Funds & Hedge funds, especially the short sellers are the “apex predators of Wall Street, they hire PR people, they hire Private investigators, they go on message boards. They try to destroy companies to engineer outcomes.” These outcomes are immense profits, literally in the billions of dollars. For a taste of this, just watch one of my favorite shows also called “Billions”, it’s vicious yet fascinating stuff.

Activist Hedge funds & short sellers on Wall Street have been doing this for a long time with public companies because it’s become so competitive with multitudes of equally skilled financial operators running against each other. This really started happening in the 1990s.

There is now wider recognition in the world about the importance of Innovation and Technology. It’s very clear this is where the action and the future is. The result is that Silicon Valley’s landscape is now becoming more like Wall Street with the immense amounts of money coming in from hedge funds, private equity firms and Family offices as well as an explosion of new emerging fund managers. It is getting crazy competitive to get into the best deals. The reason is the supply of money is in excess of top founders, who now have their pick of who they let into their round.

The result is the game has changed for venture capital funds. Venture firms have to differentiate themselves from the pack and as normal, I see Andressen Horowitz (A16Z) leading the charge here.

Example Number 1 is their investment into Clubhouse.

A16z was instrumental in helping the team take it to now over 5M users in less than a year’s time. Clubhouse only launched in April of 2020. The top leaders of the firm literally do shows on Clubhouse and leverage their network of celebrities and top Silicon Valley icons to use the product. Elon Musk and Mark Zuckerberg for instance the week of February 1st in 2021 alone. This drove considerable interest from people across the globe.

Supporting points here:

https://mobile.twitter.com/dflieb/status/1356291258159820800

Here:

https://mobile.twitter.com/petergyang/status/1357452412647137283

Here:

https://twitter.com/austin_rief/status/1356431170154754055

And here:

https://twitter.com/sarthakgh/status/1359319400168517642

Example Number 2, A16Z is building out of their media arm. They literally are becoming a major media player as detailed out by Eric Newcomer:

The Unauthorized Story of Andreessen Horowitz

“While there’s a lot of loose talk on Twitter about cutting out the media and “going direct” — publishing your own story to the world without the press as an intermediary — Andreessen Horowitz is really doing it, consciously and methodically. The firm’s strategy has dramatic implications for the future of media and the venture capital industry.”

No surprise that when the media has turned very anti-tech (Although i also understand why due to the sometimes naivety, the blinding arrogance and insularity of Silicon Valley but that is another post), it does make sense to be able to tell your own story directly without it being twisted against you. But beyond this, I see this as a new way to add value to their portfolio companies. In other words, providing the distribution per se that startups really need to get their products in the hands of customers. The ranks of the General Partnership are filled with distribution experts like my friend Andrew Chen most notably on the consumer side. This very smart strategy is just an extension of this as per Newcomers write up:

“Today, roughly 10% of the 200-person firm works on its marketing team. The company is expanding its editorial operation.

Talk to anyone around the firm and Chokshi’s in-house media strategy is the future of the firm. One communications person remarked to me, “They’ve become a media company basically.”

The future of VC differentiation is you are either a personal Brand (Elad Gil, Lachey Groom & other noted Solo Capitalists) or Distribution (A16Z) or even better be BOTH.

Chamath is doing the same thing with later stage growth companies and his SPACs.

Besides financing the companies like OpenDoor, Metromile, Clover Health or Virgin Galactic He uses his extensive Twitter following to share his one page write ups on his investment and goes on CNBC to talk about his companies.

This is in stark difference compared to traditional Venture Capitalists approach of advising, introductions & influence and the taking board seats as steering mechanisms. I’m not saying this isn’t helpful as I do think that it is. But I also think if founders have a choice, it’s very clear who they will go with. Someone who will help them achieve their goals with real distribution and active true hands on help. Look at the early results of Clubhouse. I don’t know any VC firm right now in Silicon Valley that has the capabilities, the network + the will to do as much as A16Z is doing to help build their portfolio founder’s business.

Activist VCs are the future. While the top tier VC players like Benchmark, Sequoia and Founders Fund, 8VC & Emergence Capital will be fine, I suspect that many of the other more traditional Venture firms will not be able to compete. They will fall by the wayside in the increasing frenzy of Silicon Valley.

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Ever curious: Tsundoku, Reader, Aspiring Shokunin, World traveller, Investor & Tech/Media exec interested in almost everything! www.marvinliao.com