As multi-stage funds get larger and larger and the need to get into all of the power law winners is required to make their own fund math work, what happens to portfolio company conflict policies?
I think most early stage founders understand that VCs, due to the nature of the game, need to always keep an ear to the ground in search of the best companies and that it's understandable that conflicts may arise.
The surprising part based on our recent experience, was just how many VCs don't outwardly communicate or even have a formal conflict policy. We have had fundraising decks forwarded to direct competitors, been in diligence only to find out the firm was investing in a competitor (and likely using us for research), etc.
A lot of this behavior was really surprising given our background in raising from Private Equity in the past, where confidentiality is codified and understood as table stakes.
Having a clear conflict policy (e.g. how you firewall sensitive information) that is easily accessible and well communicated to founders would be a huge trust builder and seems like it should be part of every firms standard engagement process with founders.
My sense is that there are 2-3 worlds of VC, and the rules about conflicts are different in each:
1- new old school: early stage VCs with small funds making high conviction investments and looking for 1-2 “fund returners” that drive the fund and the VC compensation. Old rules about competitive investment apply.
2- index players: VC funds that run various indexes eg invest once check in every YC company. Old rules make no sense, but investing is mostly passive and no one actually cares because it doesn’t create material conflicts.
3- new school: build giant funds and become “masters of the universe.” Old rules about conflicts are burdensome and may prevent you from returning your fund multiples, so they will be increasingly excused due to firm size.
The idea that fund size is now the primary driver of strategy is something too few GPs admit and too many LPs underestimate. We're watching the shift from the old-school 'picking winners' (money ball?) approach to the modern 'own them all or fail your math test' mentality. It’s no longer about conviction.
That said, I’m not convinced this shift makes portfolio conflicts a “relic.” It makes them institutionalized. And what’s evolving isn’t the elimination of conflicts, it’s the adoption of PR-safe mechanisms to justify them: internal firewalls, different partners on boards, passive secondaries. That’s not a conflict-free strategy, it’s just a conflict-normalized one. I think (?)
Founders have never *really* had less power to object. Especially as seed funds are pressured to act like scouts for the larger firms they hope will back them later. This bifurcation between “relationship VCs” and “math VCs” is producing two types of founders: those being championed, and those being harvested.
I think we’re dangerously close to a model where early-stage VCs make bets knowing full well they’re fungible inputs to a late-stage arms race, and unless founders push back, this will become the norm.
Thank you for this. While not the core thesis of your post, this article helped me understand another dimension of why there seems to be so much money sloshing around and so little of it being deployed.
A lot more money is looking for companies at the edge then there likely are companies at the edge.
I wonder about how the dynamics have shifted. Looking back 20 years, it makes sense that category defining companies like Facebook, Amazon, Google, Alibaba, etc came to dominate segments with extreme growth multiples.
As the years pass it seems like there is less opportunity at this edge of category redefining, reality changing multiples and a much more diverse opportunity space in the middle with more modest upside potential.
Yet, a majority of the money seems to be trying to invest in the next wave of Googles.
Institutionalization of the asset class brings in new players, new competition and new norms. The close and clubby dynamic is gonzo. Knives out!
I am curious about ownership. Billion dollar funds struggling to secure 10% or more at the A and beyond will not go well, but the dollars behind these funds are playing a different game then we are: 2x all the way down.
it started with growth funds and firms investing in a competitor to a core fund holding out of those vehicles
then it became "oh a different firm GP did the [competitive] deal" plus some founder gaslighting
now it's basically all bets off at many funds. and i hope that the GPs just at least act honorably and keep stuff confidential.
the only sympathy i have for VCs are that so many portfolio companies are pivoting to find AI heat/traction, and AI speeds feature fast-follow development, so you are definitely likely to have unintentional conflicts in the portfolio now vs, say, 15 years ago.
I agree wholeheartedly. I formalized this idea in what I call the Winner Constant: a simple model showing that for every $1B deployed, the system needs roughly 0.17 true outliers (>$5B exits) to make the math work.
The problem is, the number of outliers doesn’t scale with capital. The supply of mega-exits is structurally bounded, so as fund sizes balloon, the system overcapitalizes itself. Funds end up chasing the same finite outliers across stages, bending old norms and inventing “creative” structures just to stay exposed to the winners required by their own denominator.
An overcapitalized market and fund math requires creativity. Until the ecosystem contracts to equilibrium, fund strategy will resemble abstract art.
How do investors define the boundaries of a category. I believe I've encountered investors who didn't want to talk to me because they invested in a company that I believe wasn't competitive at all (in fact, they were probably complementary). How does a founder overcome this barrier? Or should they?
Interested to know your thoughts on investors that go particularly deep on specific verticals and how they manage it. For example I've met several biotech investors that narrow themselves to something specific like "cell therapies for oncology" and then spread bet across the class where, given the availability of good targets, there's undoubtedly overlaps between pipelines.
I think most early stage founders understand that VCs, due to the nature of the game, need to always keep an ear to the ground in search of the best companies and that it's understandable that conflicts may arise.
The surprising part based on our recent experience, was just how many VCs don't outwardly communicate or even have a formal conflict policy. We have had fundraising decks forwarded to direct competitors, been in diligence only to find out the firm was investing in a competitor (and likely using us for research), etc.
A lot of this behavior was really surprising given our background in raising from Private Equity in the past, where confidentiality is codified and understood as table stakes.
Having a clear conflict policy (e.g. how you firewall sensitive information) that is easily accessible and well communicated to founders would be a huge trust builder and seems like it should be part of every firms standard engagement process with founders.
Great comment, I think founders deserve better on this front.
My sense is that there are 2-3 worlds of VC, and the rules about conflicts are different in each:
1- new old school: early stage VCs with small funds making high conviction investments and looking for 1-2 “fund returners” that drive the fund and the VC compensation. Old rules about competitive investment apply.
2- index players: VC funds that run various indexes eg invest once check in every YC company. Old rules make no sense, but investing is mostly passive and no one actually cares because it doesn’t create material conflicts.
3- new school: build giant funds and become “masters of the universe.” Old rules about conflicts are burdensome and may prevent you from returning your fund multiples, so they will be increasingly excused due to firm size.
Well said.
The idea that fund size is now the primary driver of strategy is something too few GPs admit and too many LPs underestimate. We're watching the shift from the old-school 'picking winners' (money ball?) approach to the modern 'own them all or fail your math test' mentality. It’s no longer about conviction.
That said, I’m not convinced this shift makes portfolio conflicts a “relic.” It makes them institutionalized. And what’s evolving isn’t the elimination of conflicts, it’s the adoption of PR-safe mechanisms to justify them: internal firewalls, different partners on boards, passive secondaries. That’s not a conflict-free strategy, it’s just a conflict-normalized one. I think (?)
Founders have never *really* had less power to object. Especially as seed funds are pressured to act like scouts for the larger firms they hope will back them later. This bifurcation between “relationship VCs” and “math VCs” is producing two types of founders: those being championed, and those being harvested.
I think we’re dangerously close to a model where early-stage VCs make bets knowing full well they’re fungible inputs to a late-stage arms race, and unless founders push back, this will become the norm.
Thank you for this. While not the core thesis of your post, this article helped me understand another dimension of why there seems to be so much money sloshing around and so little of it being deployed.
A lot more money is looking for companies at the edge then there likely are companies at the edge.
I wonder about how the dynamics have shifted. Looking back 20 years, it makes sense that category defining companies like Facebook, Amazon, Google, Alibaba, etc came to dominate segments with extreme growth multiples.
As the years pass it seems like there is less opportunity at this edge of category redefining, reality changing multiples and a much more diverse opportunity space in the middle with more modest upside potential.
Yet, a majority of the money seems to be trying to invest in the next wave of Googles.
Institutionalization of the asset class brings in new players, new competition and new norms. The close and clubby dynamic is gonzo. Knives out!
I am curious about ownership. Billion dollar funds struggling to secure 10% or more at the A and beyond will not go well, but the dollars behind these funds are playing a different game then we are: 2x all the way down.
100%
it started with growth funds and firms investing in a competitor to a core fund holding out of those vehicles
then it became "oh a different firm GP did the [competitive] deal" plus some founder gaslighting
now it's basically all bets off at many funds. and i hope that the GPs just at least act honorably and keep stuff confidential.
the only sympathy i have for VCs are that so many portfolio companies are pivoting to find AI heat/traction, and AI speeds feature fast-follow development, so you are definitely likely to have unintentional conflicts in the portfolio now vs, say, 15 years ago.
I agree wholeheartedly. I formalized this idea in what I call the Winner Constant: a simple model showing that for every $1B deployed, the system needs roughly 0.17 true outliers (>$5B exits) to make the math work.
The problem is, the number of outliers doesn’t scale with capital. The supply of mega-exits is structurally bounded, so as fund sizes balloon, the system overcapitalizes itself. Funds end up chasing the same finite outliers across stages, bending old norms and inventing “creative” structures just to stay exposed to the winners required by their own denominator.
An overcapitalized market and fund math requires creativity. Until the ecosystem contracts to equilibrium, fund strategy will resemble abstract art.
How do investors define the boundaries of a category. I believe I've encountered investors who didn't want to talk to me because they invested in a company that I believe wasn't competitive at all (in fact, they were probably complementary). How does a founder overcome this barrier? Or should they?
In hindsight, it seems either naive or overly optimistic to bet it all on a single company within a single vertical.
Interested to know your thoughts on investors that go particularly deep on specific verticals and how they manage it. For example I've met several biotech investors that narrow themselves to something specific like "cell therapies for oncology" and then spread bet across the class where, given the availability of good targets, there's undoubtedly overlaps between pipelines.