The palaeontologist Stephen Jay Gould was a well-known proponent of a slightly modified theory of evolution called punctuated equilibrium. Briefly, his view was that ‘normal’ incremental evolution was occasionally interrupted by radical change (meteor, volcano or another cataclysm) which in turn re-set the environment for the next period of incrementality. The end of bull markets always remind me of a version of this. Less dramatic but no less impactful in terms of re-setting the environment.
For those of you older than 40, it sort of felt like 2000.
If you are younger than 40, a massive tech bubble just burst. I expect you know that. For the past six months, many VCs have been podcasting, tweeting, publicly writing, … and generally prognosticating about what you should do and what’s going to happen next.From Brad Feld’s excellent post ‘What Just Happened’
There’s lots of VC writing out there on this topic and this is (definitely) not that. Instead I wanted to talk about the change in financing climate as it relates to the people actually running companies.
The last five years were a perfect time for technical/product founders who brought vision to the table. There was a lot of investor talk about backing visions with patient capital. And even though the nature of this market punctuation was not sudden, the change of atmosphere has been radical enough to leave a lot of companies with an operating model overhang.
A lot of portfolios (especially at Series A and above, certainly growth) now have companies which will need to “grow into their valuations” (I love this euphemism as a way of deflecting a poor pricing call by investors). These are companies which need to make difficult decisions to get to unit economics fast. That means efficiencies of scale, cost, or perhaps entirely shifting position in the value chain. It means M&A (there is going to be a *lot* of M&A). Fundamentally it requires not the prosecuting of a vision, but the building and running of a sustainable business. The next few years (two, five, seven?) are going to be squarely focused not on the visionaries, but the operators.
You can generally tell an operator by their level of comfort discussing things like exit strategies, resource allocation, opportunity cost and cashflow. As a generalisation, I find they’re often shunned by VC (‘not a big enough vision to make the portfolio economics work’) but embraced by PE (‘this person will make us money’). If you want a few examples, The Outsiders is a great collection of these characters.
I haven’t yet analysed VC cash distribution (rather than ‘value’) generated by technical/product founders versus operators over time although (despite the tone of this post) I could believe it’s weighted heavily to the former. However I’d also be willing to bet that the greatest value creation over the next five years will come from operators rather than visionaries. Investors, allocate your capital accordingly.