a16z and dumb capital

Before I jump in, a quick preface. I’ve been meaning to start writing more in order to build a body of work as well as simply maintain/get better at writing. I’m going to write a post every day for the next 30 days. For the most part, I’m going to focus on tech/startup topics.

The first is on a16z and how they’re using clever marketing to get a leg up in the venture capital game.

The VC game is usually conceived as follows: there is a limited amount of capital in funds whose sole purpose is to find high-risk investments in hope of a large payoff. Entrepreneurs vie for this limited pool of funds. The best VCs are the ones who have backed significant winners in the past (KleinerPerkins:Google, Sequoia:airbnb, Union Square Ventures:Twitter, etc.). Being backed by one of these not only allows you enough resources to pursue your business, but also comes with a seal of approval meaning you’ve been thoroughly vetted and endorsed by the apostles of high startupdom.

But due to phenomenal returns in the past decades and the success/IPO of several major venture-backed companies (Facebook, Twitter, Amazon, Tesla etc.), and increasing number of investors are trying to get in on the action. Not only are these sophisticated investors like pension funds and endowments, but also smaller investors who can now invest directly in companies through platforms like Angellist.

However, in order for returns to hold as the pool of VC capital expands, the number of quality investments must expand on a 1:1 basis. While we’re seeing an increase in the number of companies/startups founded, there’s a great deal of “noise” in the market generated by lifestyle entrepreneurs or folks with delusions that their pet idea could somehow be a venture-scale business. It certainly isn’t clear that the ratio of quality investments is expanding at the same ratio, and a lot of evidence to suggest otherwise.

As a result, (venture) capital is competing to get into the best business deals. A dollar is a dollar is a dollar – capital is by definition undifferentiated. So a lot of the Venture Capital funds who had deal flow just by virtue of being the only game in town now have to compete to get into a great deal, especially at later rounds.

The brand/seal of approval isn’t sufficient anymore. Now, it’s necessary to add value some how – differentiate the investment.

One can argue that VCs are often stocked with top business school graduates and can create opportunities by tapping into their networks – traditional business by making introductions. Which is certainly very powerful. But tools like LinkedIn for generating business opportunities are eroding that advantage. Additionally, some might argue that the occasional associate/partner might offer some life-changing advice. Maybe. Maybe not. Maybe…

Entrepreneurs are increasingly repurposing Mark Wahlberg’s theory on Feds for their VC relationships: “My theory on [our investors] is they’re like mushrooms, feed ’em shit and keep ’em in the dark.”

Enter a16z. Not only do they have a full-time staff or marketers and business developers to actually boost business for their portfolio companies, they’re busy telling everyone how much they know about the business of investing in startups. Classic content marketing.

a16z deploys its staff and network across all manner of channels in order to establish their credentials and reach would-be portfolio companies. The message: not only do we know tech, but we understand where tech is going in all industries and all markets. We know your business, we know what’s happening in your industry as well as what’s happening in adjacent industries that could affect your business.

a16z’s content marketing assault is firing on all fronts, not only traditional channels (panel appearances, conferences, interviews in the New Yorker, Twitter [funny that Twitter is now a conventional channel]), but also owned media such as their blog and podcasts.

Their podcast presence is particularly impressive, which first drew my attention to a16z’s leadership in the industry. Not only are podcasts in-depth, featuring serious experts from their considerable network as well as portfolio companies, but the podcasts are remarkably frequent as well, no small task for what is essentially a finance company.

It’ll be interesting to see where a16z takes it from here, but it’s already clear they’re pushing the envelope on what it means to be a VC, or at least communicating that. And it seems to be paying off so far: a16z boasts hits like airbnb, Uber, Box, BuzzFeed, Slack and Zenefits.