We hosted a vibrant town hall discussion with Nikhil Basu Trivedi, writer and former investor at Shasta, about his four-part deep dive on the state of venture capital in his newsletter next big thing. Within just a few weeks of its initation, next big thing has become one of Substack's top publications. Read on for thoughts on the venture landscape, mentorship, and the five key elements of a VC's job, from Nikhil and guests like Katie Stanton (Moxxie Ventures), Julia DeWahl (angel investor, ex-OpenDoor), and others.
I: The Writing Process
Several years of thinking and months of habit lie behind Nikhil's success with next big thing. Though he started publishing on Medium around seven years ago, he worked to cultivate a more intentional writing habit after leaving Shasta this spring. "I started trying to write something every day this April," he said. "There's a lot of stuff I've been thinking and writing about, but never published—I probably have thirty-eight different drafts of [Medium] posts that have been sitting there over the years. I just decided to bite the bullet. When you sit nowhere, when you're untethered, suddenly you can start to talk about things without being biased."
II: Today's VC landsacpe
Market gaps and new opportunities
Between seed and Series A: "There has always been a bit of a gap between seed and the product-market fit Series A or Series B," Nikhil said. (Think seed extensions, seed plus, post-seed, etc.) "There's the chance to believe in something before the traditional A or B, maybe at the incubation stage too."
Venture studios that incubate companies enjoy proprietary sourcing, with a caveat. "I like to find companies where I feel that it's the founder's life's work to make that idea a reality," Nikhil said. "If the idea was born out of a studio, that's just not going to likely be true."
"Atomic is doing a good job partially because they only focus on the studio model. The key decision is who comes in as CEO...you get, say, 10% of a company pretty early, but the idea is there and there's already a team and some semblance of a product."
The IPO: "There is a democratization of the IPO through SPACs, and I think a number of venture firms—both agglomerators and specialists—are going to go there," Nikhil said. Several individuals, like Chamath Palihapitiya or Kevin Hartz, are also leading SPACs. "Chamath is like a solo capitalist and an agglomerator doing SPACs, so I don't know where to put him."
III: Mentorship (for both founders & investors)
For founders: Nikhil suggested that the purest manifestation of "betting early" is betting on someone before they even have an idea. So, Julia DeWahl asked, why don't seasoned venture investors team up with young talent to start things together more often? (Think Keith Rabois, who co-founded OpenDoor with Eric Wu, or Jim Barksdale who worked with a young Marc Andreessen on NetScape). Are there strong models for this? Are they best as mentoring relationships, or with more of an equity setup?
For investors: The venture ecosystem is full peer mentorship opportunities for investors, from relationships at firms to informal Slack and WhatsApp groups. "In the solo capitalist group that I highlighted, Lachy Groom and Josh Buckley live together and talk about stuff all the time, and both have their own funds," Nikhil said. He himself has learned both from peers like Katie and Julia and from mentors at past firms like Insight and Shasta.
"There is a lot of cross-pollinization in this industry," Katie Stanton noted. "I learn a lot everyday from a founder or another coinvestor—it's about finding the best and the brightest people aligned with your values." Julia added, "What I've found most helpful is to talk specifically about one company with another person and then go deep together."
That said, mentorship can be harder to reach for individual angels who don't work with teams. When venture investors reach out to angels, they often ask for sourcing leads but rarely offer mentorship. "I'd love to establish more of a relationship with [experienced investors willing to provide more mentorship]," Julia said, "but I'm surprised that hasn't happened more yet."
IV: Rolling VC funds
Rolling funds are new structures created by Angel List, in which LPs can commit to investing in venture funds on a rolling quarterly basis. (An LP can invest $200k equally split over eight quarters, for example).
Nikhil noted that the rolling fund model has the potential to democratize seed stage investing and increase access to capital for young founders. The first big announcement of a rolling fund came from Sahil Lavingia, whose fund now has over $1M per quarter in commitments. Consider some quick math around Sahil's fund: "He's got around $5M a year to invest. Think about the average venture fund being invested over three years, with roughly half of the fund for new investments and half for reserves. Having $5M/year, or $15M per three years, is like having a $30M fund. But he raised it in a couple of months through a few tweets," Nikhil said.
Of course, it's early yet. "We're going to see some other really interesting test cases, where bigger funds try to raise through this platform, simultaneously raising from institutional LPs and Angel List LPs through rolling funds," he said. This activity will have various implications. First off, fund math is going to change: "Traditional funds call capital from LPs when they want, which goes into the calculation of IRR. The rolling fund model, though, has capital committed every quarter." Rolling funds will also present new complexities, with reserve models up to individual managers' discretion and different LPs investing in follow on rounds vs. initial rounds.
Investors will undoubtedly be tracking the progress of investing through rolling funds—Nikhil's solo capitalist piece has already helped drum up some interest. "If this doesn't work out, it'll be because people treat it as a hobby. It's really important if you're investing in early stage companies that the commitment is serious," he said.
V: The VC Flowchart: Find, Decide, Win, Exit
Much of our conversation touched upon different pivotal elements of Nikhil's five-part venture flowchart, with a special focus on decisionmaking. The best investors know this flowchart deeply, developing specializations in one or a few of these areas.
Fit your sourcing with your specialization: Firms need to fit how they find companies with their stage or sector specialization. Agglomerators who are investing in everything need to see every company at every stage, often employing an army of people and technology to assist. Firms that either lack a clear strategy or have team members who don't match their strategy will struggle.
Gaining an edge: "People try to 10x on the "Find" piece by investing in people or using data—I'm skeptical that the data piece has led to a significant advantage for anyone yet, but it may in a 20 year timeframe," Nikhil said.
Operating in a remote world: Great companies can be anywhere and so can great firms, which may even benefit from a distributed partnership. "A fund like Blackbird in Australia has a >10x early stage fund—we're seeing great performance in venture across the world."
The biggest opportunity in venture, according to Nikhil, is around optimizing for the decide piece. "That is the hardest part about our business. Any venture capitalist will have seen more than enough companies in their career to have been one of the greatest firms of all time. And most of them didn't lose—they decided not to invest."
Decisionmaking is about humans—and that's difficult to scale. "What is hard is not what objective and factual. What is hard is what is human, and subject, and feelings or intuition based."
Different firms try their own approaches to improving decisionmaking. At First Round, for example, "each partner inputs their own independent thoughts on a company before the partnership debriefs, which helps eliminate some bias. They go back to see where individual partners spike and where they get things wrong."
What about Nikhil's own decisionmaking process? "I obsess over it," he said. "I have different internal tests for my conviction—am I going to sleep thinking about [a company]? Am I waking up thinking about it? Am I so excited that I want to flex up on valuation? How easy is the blog post or memo to write about the investment? I also take religious ntoes on every company on what I like, what my questinos are, and what the net-net is. I've gone back to study that to think about what I got right or wrong."
"Most companies fall into a gray area—they're interesting, you like a lot of elements, but for one reason or another you don't quite get there. A few solo GPs just say no to everything and wait for those couple meetings a year where they get so excited they have to do it. There's a way to potentially use all of that unstructured data as a firm, and that's something I'm quite passionate about."
Most big firms focus here—having strong deal flow and "find" and "decide" mechanisms, they need to ensure they can outcompete other firms to partner with the best founders. Being a mass collaborator can also help, like angels who write small checks into many deals.
Firms like a16z and First Round demonstrate how to exceptionally help founders post-investment. Individual investors' backgrounds as operators or advisors can also help founders. This is also an area that solo GPs might find trouble delivering on at scale. (Many don't take formal board seats—"so you could have a company that has raised tens of millions of dollars and is close to Series A, but has no board governance," Nikhil said. "That feels worrying to me.")
No one has really tried to differentiate themselves from the pack based on the exit piece—what would that look like?
VI: Nikhil's question for us
"I'm thinking a lot right now about decisionmaking. You can think of life, ultimately, as a set of choices...when you look back, you remember the choices you made. How do you make the right choices the maximum number of times in your life? It's a fascinating thing I keep thinking about– it applies to my work, my personal life—everything."
You can read Nikhil's answers to more questions and join the discussion on our group annotation page on Highlighter. RSVP for future town halls at www.highlighter.com/discover (including a session with Annie Duke on September 15th, for the launch of her book How to Decide)!