iv. agents
characterizing roles in venture capital theatre
"Architecture is teamwork,' said Sinan.' Apprenticeship is not."
- Elif Şafak
space
The Set (or Asset Class). The venture capital landscape has undergone a remarkable transformation in the last decade. Not too long ago, it was considered a cottage industry within the financial world, primarily associated with funding startups in or around Silicon Valley. Today, VC has become a global phenomenon, driven by the democratization of technology, the rise of entrepreneurial ecosystems in new regions, and a growing appetite for innovation-driven growth.
As VC expanded beyond its traditional borders, it began encompassing various industries, from fintech in Latin America to biotechnology in Europe, making it a more resilient and versatile asset class. While North America still leads in total VC investment, regions like Asia, Europe, and Latam, among others, have made significant strides, accounting for more than 50% of total VC dollars. This global expansion has also led to risk diversification, as investors can now spread their capital across different markets and industries, mitigating the impact of localized economic downturns.
program
The Shareholder (or Limited Partner). Limited Partners (LPs) are the often-unseen yet crucial players in the VC ecosystem. They are typically institutional investors like pension funds and university endowments, who allocate a portion of their capital to VC funds in the hope of earning outsized returns. LPs are akin to shareholders, providing capital to VCs who have a fiduciary responsibility toward them. LPs must balance their portfolios across various asset classes to achieve their specific risk-return profiles. Their involvement in VC is often motivated by the potential for higher returns, which, while volatile, can significantly outperform traditional asset classes like public equities or bonds over the long term.
In recent years, there has been a noticeable shift among LPs toward more significant allocations to VC. This trend is driven by the success of notable funds and the maturation of the venture ecosystem, which now offers more predictable returns due to the growth of late-stage investing and the rise of secondary markets. Data from Preqin indicates that over 60% of institutional investors plan to increase their allocations to VC in the coming years, reflecting a strong belief in the asset class's ability to deliver superior returns.
technology
The Business (or General Partner). General Partners (GPs) are responsible for crafting the investment thesis, assembling the investment team, designing the investment process, raising capital from LPs, identifying and investing in promising startups, and guiding them to successful exits. GPs are often experienced entrepreneurs or career investors who bring a wealth of knowledge and networks to the table. Their role is multifaceted, requiring them to be both financial stewards and strategic advisors.
The debate between the merits of former operators versus career investors as GPs is ongoing. Still, the trend has been toward teams that combine both skill sets. Operators with firsthand experience in building and scaling companies offer practical insights and a deep understanding of industry dynamics. On the other hand, career investors bring a disciplined approach to deal-making and a deep understanding of financial markets. Studies have shown that firms with partners who have both operational and investing experience tend to outperform their more homogeneous peers.
building
The Client (or Founder). Founders are the heart and soul of the venture capital ecosystem. They are the visionaries who take on the enormous challenge of building something from nothing, often risking their own financial stability and personal well-being in the process. Founders are the ones who conceive innovative ideas, rally teams around a shared vision, and execute plans with the hope of creating transformative products or services. The relationship between founders and GPs is symbiotic at best. Founders provide the ideas, energy, and execution, while GPs offer the resources to help turn those ideas into scalable businesses.
The landscape for founders has also been evolving, with an increasing emphasis on diversity and inclusion. The data is encouraging: the share of VC funding going to startups founded by women and minorities has steadily increased, albeit from a low base. For example, US startups founded by women raised $54.5 billion in 2021, representing 17.2% of total VC funding—a significant increase from previous years. This trend is not just a matter of equity but also performance, as diverse teams have been shown to outperform homogeneous ones.
flow
The Service (or Platform). VC firms have increasingly recognized the importance of offering value-added services to help startups succeed. The emergence of platform teams reflects a broader shift in the VC industry, where differentiation is critical. With more capital available than ever, GPs are pressured to offer more than just money to attract the best deals. Platform teams enable VC firms to build deeper relationships with their portfolio companies, often becoming trusted advisors integral to the company's success.
Data from PitchBook suggests that firms with robust platform teams have better outcomes, including higher rates of successful exits. It is likely because these teams help startups navigate the complex challenges of scaling a business, allowing founders to focus on what they do best: building great products and services.
context
The Cycle (or Timing). Timing is everything in venture capital. The success of an investment often hinges on the broader economic, technological, and geopolitical context in which it is made. GPs and LPs must be aware of these external factors and how they might impact their investments. It requires a keen understanding of market cycles, technological trends, and regulatory environments. Understanding these dynamics is crucial, as they can dictate the availability of capital, the pace of innovation, and the potential for successful exits.
Moreover, the timing of exits is critical. GPs must not only identify promising startups but also know when to sell or take a company public to maximize returns. This requires a deep understanding of market conditions and the ability to navigate the often complex processes of IPOs, M&A, and secondary transactions. Knowing when to sell is arguably the most underrated—and, in some cases, the most important—skill of a successful venture capitalist.