If I could shout it, I would: Don’t lose your seat in the turbulence ahead!
The past decade really has been a golden age of venture capital. Measures of AUM, investing activity, and even aggregate actual distribution returns steadily blossomed culminating in a tremendous 2021. All of that seems now to be coming crashing down, just like the NASDAQ over the past few months.
In these perilous times, the second rule of venture applies more than ever: don’t lose your seat. I repeat, do not lose your seat.
I personally have seen two major downturns in my professional career. The first was after the dot com bubble. On the heels of successfully selling my email marketing startup, the next few years telling people that I was “an internet entrepreneur” brought dirty looks, scorn, and perhaps curiosity at best. But when I landed my first venture capital role in 2004, over four years after the peak of that tech bull market, I didn’t have any peers. Nobody was getting into venture at that time. The hangover was that long. The closest thing was a few people a half-generation ahead of me who had held onto their bubble-era jobs for dear life over the previous few years. They had endured and survived. Then, while at a venerable firm during the next downturn of the global financial crisis, I had a first-hand seat watching a number of my own peers shed from the industry, “excited to explore operating again” or “do a deep dive in a space via a corporate role.”
Just as you and your partners are telling portfolio Founder/CEOs to extend your runway for at least two years, you should be thinking about yours in the industry.
Wait, don’t VCs have fixed immutable revenue streams? Yes, but if the firm isn’t in deploy-on mode, anyone on the investment team is part of an unnecessary cost center… literally taking dollars out of the senior partner’s pockets. And with their paper carry gains evaporating by the minute as the public markets fall, the easiest place to make up that perceived compensation shortfall is from the variable costs of the firm. VC layoffs and “departures” are both quiet and a lagging indicator, but I’ve already chatted with a couple of non-partner VCs I’ve met through writing this substack who have been shown the exit door (or at least been reminded where that door is in the building).
So first things first, it’s helpful to have an understanding about how much at risk you really are and how soon. Again, the lesson here is to look to address some of the same questions that all of the VC blogs espouse for entrepreneurs. When was the last time your firm raised a new fund? Unless it’s a blue chip shop, don’t plan on them closing a new one in the next 12 months, and most likely it’ll be smaller than originally anticipated. How much of the priority has been focused away from making new investments? The best way to understand that answer beyond qualitative feel (or explicit directive) is to look at the raw numbers - how many new investments did your firm make in Q2’2022 vs Q3’2021? Lastly, recognize the stage of investing where you’re sitting. Later-stage firms are the least insulated from public market gyrations, whereas it takes a while for those to trickle down to seed stage firms. That being said, on average, the former are more durable and typically have a longer history, so understand your place in the ecosystem. And if you’re in a corporate venture arm, recognize that history has the deck stacked against you.
OK, you get it, good advice, but what does that mean? You are where you are, and cannot change reality. What practically can you do to hold on? Make yourself incredibly useful. Figure out ways to both broadly yet specifically contribute to the firm. If new investments aren’t a priority of the organization right now, figure out what is and shift to it (hint: helping existing portfolio companies is probably closer to the top than it was six months ago). The world has changed, so you need to, too. Only the paranoid survive.
Your career in venture capital is an endurance race, as the feedback cycle is long and the signal-to-noise ratio is low. And how do you win an endurance competition? First, you must stay in it. When I think back to those VCs who were a half-generation ahead of me when I entered the industry nearly two decades ago and to those peers who stayed employed during the global financial crisis, they’re all now senior partners at established firms, founders of rising firms which they’ve since started, or happily retired. Conversely, former VCs then are still former VCs today. If you want to stay a venture capitalist, don’t become a former VC. Instead, let’s try to get through this, together.