As part of our Equity Summit, we had the pleasure of welcoming powerhouse investor Fred Destin as keynote speaker. Over a fascinating session, he shared his insights on the VC revolution and offered advice for startups and founders looking to capitalise on today’s positive funding landscape.
Currently heading up the artisanal VC fund Stride, Fred boasts a long and successful track record with Accel and Atlas. To date he’s backed six billion-plus companies from seed, including Deliveroo and Cazoo.
PART ONE: The tsunami
Fred started out by describing two waves that are combining to transform the way technology funding is happening.
“The first wave is the search for yield,” he said. “If you look globally today you’ll find that with all of the quantitative easing we’ve had, fixed income isn’t delivering as a method of personal wealth creation. Real estate is always an option, but there are not many places you can find yield. Technology, however, has proven pretty good at riding downturns.”
Fred recalled how tech rode out the economic collapse of 2008, and how the Covid-19 pandemic ended up accelerating global adoption of various technologies. Global work-from-home orders sped up the migration to a digital world. Real estate might have a lot of leverage, Fred explained, but tech provides a decent hedge against inflation.
“The second wave is software. We started by digitising music and film, before moving onto e-commerce. But now, software is accelerating into all the real-world verticals, from agriculture to food production.”
It was Marc Andreessen who said software is eating the world, and he was absolutely right. This second wave is all-consuming.
A startup explosion
“People have realised that startups are an evolutionary form, designed for chaos,” said Fred. “They operate in chaos, and that’s why they’re hard for the incumbents to beat.”
By his calculations, there are four key reasons we’re able to build startups even faster today:
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An abundance of data – “We have a lot more information and visibility on how we build our companies, which enables us to respond in real-time to events.”
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The potential of platforms – “Today, everything can be a platform – and new companies can simply build on what Amazon Web Services started.”
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Greater awareness of context – ”Technological advancements mean we now have sensors all around us providing useful information and giving us extended feelers into the real world.”
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The rise of robots – “Sure, there’s the traditional idea of robots as mechanical arms in factories, but today we have software robots transforming workflows via automation platforms.”
All told, these factors combine to produce an incredible speed of execution and operating leverage.
“On the one hand, we now have the ability to scale infinitely. But on the other hand, we have the considerable challenge of harnessing the complexity that comes with big data and fast-moving environments.”
Europe’s unicorn factory
We’ve been generating unicorns a lot faster in Europe in the last twenty years. 70 startups achieved this coveted status in 2021 – a dramatic increase on 2020’s intake of 18 new unicorns and more than quadruple the number of European unicorns created before 2014.
However, Fred pointed out that startup valuations don’t move in a linear fashion. “Non-linear growth challenges how the human brain processes information,” he said, “which explains why it’s so hard for startup founders to put a value on themselves and their companies in those early years.”
Nonetheless, dozens of European companies now reach unicorn status each year. Two main factors are behind this shift: data and dynamics.
The age of transparency
“We’ve got more market transparency than ever before,” said Fred. “VCs have data tools to indicate how and why companies are growing, which has led to more pre-emptive rounds and non-linear valuation journeys.”
“On the other side of the equation, founders are now way more educated,” he explained. “They have a lot more access to information about the reputation of VCs. For me as an investor, the game is increasingly about getting picked. Founders are in the driving seat.”
Different investor dynamics
Fred also suggested that we’re currently witnessing a significant change in investor priorities. “There’s a growing focus on escaping pricing pressure so that investors can focus on differentiating, competing and winning.”
At the same time, VCs are searching for ways to capture value across a startup’s entire lifecycle and escape the limitations of closed-end funds, while also maximising carry opportunities and management fees.
These shifting dynamics affect all investors. As a result, the key question is how you can keep on winning when everyone has access to the same deals, the same tools and the same approach?
For Fred, there’s a three-pronged answer. “You achieve scale, you index the market and you focus."
PART TWO: The revolution
To place changing investor dynamics into context, Fred gave us an important lesson on VC history and recent innovations.
“The first wave of real innovation in venture capital goes back around eight to ten years, when we started to see a family of funds agglomerate into mega-firms like Sequoia.” Next came the rise of concierge-style services, such as First Round and Andreessen Horowitz.
Some organisations took a different route. “You also have artisan funds, which is our chosen model at Stride,” explained Fred. “Then there are firms deploying network strategies – where their asset is access to an established network – and solo capitalists who are very focused and specialised.”
Finally, there’s a host of alternative structures, such as SPVs, SPACs and Opportunity Funds, now coming to the fore.
Investor diffraction
Fred went on to talk about the second wave of innovation in VC funding. Likening this process to diffraction, he suggested that firms are becoming increasingly specialist. “The second wave of innovation we’re seeing is market indexing. There’s also startup engineering, revenue-based financing and celebrity funds.”However, when you look at the figures for the number of funds being raised over the last few years, they’ve fallen drastically. In fact, they’ve dropped year-on-year since 2018. “This may seem like a contradiction,” Fred said. “But it’s actually a direct consequence of the change in market structure.”“Large firms are locking up all of their limited partners and all the liquidity is going back to the likes of Sequoia and Accel. Effectively, limited partners no longer want to build new relationships with funds and undifferentiated firms are really starting to struggle.”
Spotlight on: Leading VC firms
To help us understand what VC specialisms look like, Fred described how some of the sector’s biggest movers and shakers operate.
A16Z
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Started on an operator model, offering support with talent, marketing, PR, corporate development and regulations.
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Over time, A16Z realised the value of mind share and became a media company at the frontend, while also aggregating a large number of investment vehicles, including bio and crypto funds.
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There’s a fair amount of speculation that A16Z will soon go public.
Sequoia
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Created a “meta fund” that takes LPs’ (limited partners) money and decides what sub-vehicles it goes into. The proceeds from maturing companies then go back into the meta fund.
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The meta fund has no pressure to sell because it’s a crossover fund that can hold public equity.
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It puts the GPs (general partners) in charge of the entire process and helps Sequoia achieve massive scale.
Tiger
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Possibly the biggest and most important disruptor currently out there.
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Tiger’s strategy involves making a lot of bets on a lot of companies –high-velocity plays that build hyper-diversified portfolios with low variance.
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Investing in a large number of companies isn’t usually good for founders, so Tiger increases its value by making fast decisions, providing access to big budgets from BCG and then ‘getting out of the way’ so that founders can work with their early investors.
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Traditional series B/C investors can’t compete with the scale, speed and intent of Tiger.
Stride
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Stride is non-scalable by design, taking a selective, artisan approach.
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Stride deliberately works on unusual insights and projects.
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It focuses on helping founders at an ambiguous stage, when it’s more important to ‘invent the future’ and express creativity than apply numbers and statistics.
The European revolution
A big factor in the development of the European VC scene is the arrival of US and Asian investors in the market. Today, a considerable number of big-name managers are setting up shop in Europe.“There are around 20 funds that have invested relatively aggressively over the last few years,” he explained. “But what I find fascinating is seeing large VC firms – traditionally late-stage investors – doing seed and growth-stage deals in the Czech Republic and France. It’s symptomatic of the shift we’re seeing at the moment.”“The market’s also opening up and there’s a willingness to look at emerging managers, new solo GPs and micro VCs.” For Fred, this is part of the growing recognition that there needs to be a changing of the guard. “LPs are realising that we’re in a market that’s been skewed by public money, that many companies are only in business because they keep getting money from funds like the European Investment Fund and British Business Bank – it’s time for new blood.”
PART THREE: The play
Building on the themes covered so far in the session, Fred turned his attention to why founders should care about developments in VC funding and, more importantly, what they should do with this information.
Capitalising on change
He highlighted four key changes in venture capital that founders should leverage:
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Access to global capital and competition – “As a founder, you’re now able to target the best investor for your company and industry. However, it also means that your competition pool is now global.”
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Speed of investment – “Capital can be acquired quicker than ever. However, the first investor through the door may not be the best one for you. Founders should not be pressured into shotgun weddings. A toxic investor will suck the joy out of your life and ruin your company.”
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Larger round sizes – “Valuations and round sizes are up, which is great for founders. However, too much capital can burn a company and founders need to make sure that inflated expectations don’t damage long-term sustainability.”
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Pricing is fantastic for founders – “However, given non-linear price increases, you may find it more difficult to determine clearing prices. Founders need to determine which VC is giving you a great price versus which VC is going to be a good investor. VCs who often lose out may overprice and you need to work out what a reasonable trade-off is.”
If there is one lesson that Fred has taken from his 20 years of experience, it’s that the quality of the investor matters. “You need to get to know someone and trust you can work with them,” he explained. “I’d rather not raise than raise from assholes.”
The hunter vs the hunted
In a world where investors have complete visibility over almost every aspect of startup growth, founders can either be the hunter or the hunted. “Founders have maximum agency,” argued Fred. “So long as they can harness it.”
To help founders ensure they are the hunter, he offered up three golden rules:
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“Stay in control and manage your bandwidth hard. That means saying no to meetings. If you tell a VC that you’re heads-down building and that you can’t meet them, that will only be met with respect.”
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“Be really deliberate about who you target. It’s difficult to get visibility on the universe of investors you can approach.” However, you can improve your chances by:- Working on list-building and understanding which investors suit your startup.- Knowing who you want to speak to within an organisation and making sure your introduction is done well.- Building the hard relationships early. To do so, you’ll need to plan for it.
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“Execute funding rounds patiently. Don’t take the first offer. VCs are very good at guilt-tripping founders into signing a term sheet, but you need to stay in control. You have more leverage than you think.”
Building a personal brand
Fred closed out the session with some parting advice on the power of personal brand. “It's an extremely valuable thing to do these days,” he explained. “If you look at people like Aaron Levie or Elon Musk, there’s no doubt these strong personalities can carry a lot of weight, a lot of mindshare and actually end up a major part of your marketing strategy.”That being said, Fred was keen to emphasise that a personal brand isn’t all-important. “One of my favourite examples is Scott Knoll at Integral Ad Science. He's a quiet, discreet, understated person. If you’re a natural communicator and you enjoy it, go for it. If you’re not, don’t. My advice is to play to your strengths.”