Playing the Long Game in Venture Capital

Silicon Valley and the media industry that surrounds it values youth. The culture is driven by the 20-something irreverent founder with huge technical chops who in a “David vs. Goliath” mythology take on the titans of industry and wins. It has historically been the case that VCs would rather fund the promise of 100x in a company with almost no revenue than the reality of a company growing at 50% but doing $20+ million in sales.

The Valley has obsessed with a quick up-and-to-right momentum story because we were thought to live in “winner take most” markets. Since funds were driven by extreme successes in their portfolios where just one deal could return 5x the entire fund while 95% of the fund may have done well but not amazing, not missing out on deals was critical. It literally drove FOMO.

But markets have changed and I think investors, founders and experienced executives who want to join later-stage startups can all benefit from playing the long game. Think about how much more value was created for all these constituencies (and society) by Snap staying independent vs. Instagram selling to Facebook.

This is true in consumer but it’s also true in enterprise software. Case in point, Procore just went public and is trading at an $11 billion valuation. This “overnight success” was first financed in 2004. Imagine if, say, Autodesk had purchased it in 2009 for $100 million?

As Jason Lemkin notes, there are many more companies worth $10 billion+ these days and some up to $100 billion or more so both investors & founders can make a lot more money (and have a lot more impact) by playing the long game. Here is his post that covers the topic.

 — @jasonlk

How the Long Game Has Benefitted Upfront

I was thinking about it this morning in particular and thinking about my own personal investment history. Of the first four investments I made as a VC in 2009, two have exited and two (Invoca & GumGum) still are independent and likely to produce $billion++ outcomes .

One — Maker Studios — sold to Disney for $670 million and since our first investment was at < $10 million valuation we did quite well. Still, I begged the CEO and the founders not to sell. I was convinced then, as I am now, that the creator economy would be very large and that companies that had built tech and processes to serve these large creators would be very valuable. The former CEO of Maker, Ynon Kreiz, is now the CEO of Mattel and the former COO, Courtney Holt, is a senior and important exec at Spotify and remain close friends to this day. With the set of cards we had at the time we sold, but what I wouldn’t give to still be working with and going long these two.

The second “exit” — Adly — innovated in social media advertising and for a variety of reasons wasn’t ultimately successful and went to zero. The talented founder & CEO (Sean Rad) went on to create Tinder after Adly, proof that sometimes it takes the intersection of great founder + great idea + timing to produce a multi-billion outcome.

The other two remain independent companies and I believe both will now easily clear $++ billion outcomes that will benefit early investors like Upfront (we did both at < $10 million valuations) plus founders (most of whom have moved on), execs that now run these companies and even the investors who were willing to back them at later stages.

All four companies were in Los Angeles (or adjacent … Santa Barbara) and our community has now matured and regularly produces billion dollar+ outcomes.

The Abundance of Late-Stage Capital Benefits All

A lot has been said about the negatives of the late-stage capital that has entered the VC world but the reality is that it also is incredibly important at funding “the long game” and letting many of these companies remain independent and ultimately IPO.

The abundance of late-stage capital is good for us all.

My first ever investment as a VC was Invoca. Today they announced that they acquired a large competitor in their space for what is reported to be a $100 million transaction. It’s amazing to me that a company that just a little over 5 years ago was struggling to attract capital at much more than $100 million valuation can now ACQUIRE companies for this amount.

It’s a virtue of the laws of large numbers ($100 million in ARR ) plus strong growth compounding off of large numbers plus large customers relying on our products for 7+ years or longer. And while it hasn’t been an “overnight success,” we’ll happily follow in ProCore’s footsteps. Our goal is to produce a $10 billion+ winner and remain the market leader in this SaaS category of AI in Sales & Marketing.

By playing the long game, Invoca has the potential to become a Decacorn ($10bn plus), leading the field in using AI for handling large volumes in sales & marketing call centers.

I look back at how the success of Invoca has played out for all of the various constituencies. The founder & CEO, Jason Spievak, got the company from zero to one, helped me recruit his replacement CEO and then went on to help Apeel Sciences raise its Seed Round & A rounds (led by Upfront) and now they are also a unicorn. He then went on the create an early-stage VC that I track closely — Entrada Ventures — that plays a leading role in funding in the Central Coast of California.

The second founder, Rob Duva, created another company called Fin & Field to book hunting & fishing excursions. And the third founder, Colin Kelley, remains an important contributor & CTO of the company.

All have been able to take some secondary stock sales along the way, all remain shareholders of the company and all benefit from late-stage capital provided by Accel, Morgan Stanley, HIG Capital (Scott Hilleboe) and others. Interim liquidity plus long-term capital gains work really, really well.

We are all beneficiaries of the incredible leadership of, Gregg Johnson, a 10-year Saleforce.com exec, who stepped into a $20 million ARR business and has guided it to $100 million+ and with plans to run it to $500 million+ and becoming a public entity one day.

LPs Haven’t Yet Grokked the Long Game

While the VC community realized 5ish years ago that short-termism in venture capital didn’t make sense and has capitalized on the scale advantages of letting companies go long, the LP community by and large hasn’t totally grokked this.

For years I’ve argued that there was a benefit in giving some of these companies like Invoca the time that it takes most enterprise companies to show the benefits of size and scale. But in the LP world there is an obsession with “top quartile” benchmarking in the near term, which drives skewed incentives for newer VCs to show quick returns.

At Upfront we’re very fortunate to have had an LP based dating back 20+ years who were patient as this older fund went from 2x to 3x to 4x and now looks poised to do much, much better than that. I’ll let you do the math on returns on a $187 million fund & 25% ownership on a single deal (Invoca) that can be worth > $3-5 billion or if we continue to execute perhaps even $10 billion+.

At Upfront we’re now on Fund VII, so a long-term LP base has allowed us to stay calm and focus on the long-game where we all make much more returns but I remember what it was like to be Fund II-IV and feel the need constantly to justify my existence.

It’s been nice to see some thought leaders in VC start to obliterate the myths of “benchmarking” to the top quartile in the VC world, notably here by Fred Wilson taking about VC performance relative to public markets. He writes

“Half of all venture funds outperform the stock market which is the benchmark most institutions measure VC funds against.”

The method some LPs use to compare funds is called PME (public market equivalent) but honestly my experience has been that benchmarking is really challenging for LPs (and VCs alike). Therefore many newer LPs revert to the simpler “are you in the top quartile?” as measured by MOIC, TVPI and IRR and by sources that don’t reveal the underlying data and who themselves have to rely on incomplete datasets. Because most vintages have relatively few VC firms, because interim values are difficult to measure, because the data is incomplete, these methods often are not good predictors of long-term value.

I think this puts a great disservice to newer funds who are under pressure to show “quick wins” and to push their investments to take the highest price in follow on rounds or even sell their stakes early to show quick successes.

I argued this very public in favor of A16Z when the WSJ ran an article questioning their returns. From the article …

And if you didn’t back A16Z because you were influence by their “interim marks” — DOH! Guess you missed Coinbase.

“Playing the long game” will often be dictated by whether funds can work with founders & executives not to sell early. Therefore, interim liquidity often matters. Invoca, for example, had interest in being acquired along the way at $300 million or so. Since we owned 29% at the time on a $187 million fund (the same that had Maker Studios) it would have been tempting if I were playing for quick wins. I am super thankful that the execs of Invoca (and the founders) were aligned that we all wanted to build something much bigger.

Not selling early can have profound effects on returns. Consider the case of Roblox (recently went public for ~$50 billion valuation) vs. MineCraft (Mojang), which at the time was seen as a spectacular success for selling to Microsoft for $2.5 billion. The virtue of going long.

And FWIW, the final of my first four investments, all from this same fund, was, GumGum who recently announced it closed $75 million in financing led by Goldman Sachs. The CEO & founder, Ophir Tanz, has gone on to create his next big startup, Pearl, backed by David Sacks at Craft Ventures amongst others. Another founder, Ari Mir, has gone on to found Clutter that has raised hundreds of millions from Softbank and others.

The third founder & CTO, Ken Weiner, remains at GumGum as CTO and is vital to our ability to outperform the market. All three will do very well out of founding GumGum and their subsequent companies. By any external benchmarks this will be a $billion++ company. Luckily there was also a talented executive team led by Phil Schraeder, who wanted to “go long” and build an industry leader that can IPO. There was later-stage capital provided by Morgan Stanley, NewView Capital, Goldman Sachs and others that gave us a long-term outlook.

Without the current exec team of Phil, Patrick, Ben, Ken and others GumGum would have had sub-optimal returns for us all. Now we’re all poised to watch an industry-defining company emerge in contextual advertising as regulation and big tech scales back the use of cookies and scales up the emphasis on privacy.

Playing the Long Game Benefits us All

All FOUR constituencies win by playing long: founders, early VC, late VC and executives. And the fifth — society — also wins by making sure we don’t have too much concentration in technology innovation, which is surely a great thing for us all.

The massive shift of dollars the moved from public markets to private markets has benefitted us and while at times can distort valuations as they themselves chase FOMO, the net results will be net positive for us all.

Photo by Aaron Andrew Ang on Unsplash

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Playing the Long Game in Venture Capital was originally published in Both Sides of the Table on Medium, where people are continuing the conversation by highlighting and responding to this story.