When VCs Change Their Stripes (And Why)

It's getting crowded in the VC buzzword graveyard.

I have a confession to make. I keep a secret document in my google drive titled “Fund Theses That Piss Me Off.” And every time I read about a VC fund with a generic, meaningless or buzzwordy thesis, that manages to raise a bunch of money regardless, I copy/paste it into my burn pile.

This is how I started to notice a couple of years back how sometimes VCs will make dramatic changes to their thesis and investing focus. And it happens not just at a fund level, but across whole chunks of the industry, too.

Take, for instance, climate VC. This was a white hot category not too long ago. Today, all of a sudden, all the climate funds are gone, or they’ve gone quiet. One climate VC that I used to send deals to is now doing “AI for climate” investing - something that I’m sure they know is an oxymoron. There are still funds doing what used to be thought of as climate deals, but now they have to talk about it using different words - words like American dynamism, resilience, supply chain, and defense.

It should come as no surprise that particular wild swing in language had something to do with a recent wild swing in the political discourse around climate in the US. I bet you can think of some other recent VC buzzwords that, due to political realities, are all but untouchable today. Diversity being the big one - a whole generation of funds built on the thesis that talent is equally distributed, but opportunity is not, and sought to make alpha from that arbitrage, today have to describe themselves in very different terms or risk extinction.

SaaSpocalypse 😵

Politics is not the only culprit - tech trends play a big part in this, too. A couple of years back, funds that used to be generalist seed funds all of a sudden became AI funds. More recently, the so-called public market “SaaSpocalypse” - the expectation that AI is going to kill SaaS companies, which have been the bread and butter of VC for decades - is changing the strategy and language of a large chunk of the industry. Five years ago nearly everyone was a SaaS or enterprise investor. Today, it’s crickets. Last week a fund manager friend who I used to think of as a SaaS guy told me that he’s only doing consumer these days (!).

It’s not just SaaS that’s taking a hit - it’s a lot of general software investing, too. The spectacular growth of LLMs has lowered the barriers to entry in all kinds of software sectors. It is so easy to build something and launch it, that product is no longer thought to be any kind of protectable moat. And so, investors are venturing into sectors that are more immune to this, where the product is harder to replicate. Spaces like hardware and consumer packaged goods.

Both of which, not even a year ago, were extremely unpopular.

I feel for you, founders

For founders, the result is whiplash. They pitch VCs that Pitchbook says are in their sector, only to learn that their company is “out of thesis”. They find themselves in untouchable categories, and have to pivot their own pitch, pronto. They follow VC advice, only to get the opposite advice not even six months later.

By the way, this is a great reminder to founders that you should never build companies for the sake of investors. You should build for your customers, always. Investors will get it or they won’t, but the only way you’ll grow and eventually exit is by building something customers love.

Hold the VC stereotype for a sec

You might be tempted to blame this all on VC flimsiness or even hypocrisy. And sure, it plays into some well-deserved VC tropes. But it’s worth noting that founders do this, too. I bet you know some crypto folks who rebranded to AI in 2022. In fact, I bet you know some non-crypto folks who rebranded to AI recently, too. People should be allowed to change tracks, especially when there’s good reason to do so.

I myself used to eyeroll when I noticed VCs jumping on a new bandwagon. But the more I see it, the better I understand it. I no longer assume that folks pivot language out of flimsiness. I assume they’re pivoting language for the sake of LPs, or Limited Partners. Aka. the people and funds that invest in VC funds.

LPs are the lifeblood of VC

Like founders and VCs, LPs are getting signals from the press, social media, analysts, and each other. Their bosses and investment committees are, too. If there is a general belief that a sector is dead (say, “SaaSpocalypse”), it will be really hard for an LP to justify investing in a fund that’s still focused on it. Conversely, if a new sector or opportunity emerges, it will be really hard to justify not having any new bets in that space. So the LP will want to fill that gap in their portfolio. And VC funds who hit that buzzword (and can back it up with proof) will have a shot at a new LP.

In theory, our industry lionizes the contrarian. In practice, it’s extraordinarily hard to make contrarian bets and say contrarian things when you’re investing other people’s money. Because those people are hearing and reading about the things that are hot. And they’ll want to know why you’re doing something else. And, because it takes such a long time for VC bets to pay off, even if you’re contrarian and right, you won’t be proven a genius for a very, very long time. And you need to be able to raise regardless.

A contrarian take

For the record, my fund’s thesis is centered around founders rather than sectors. I occasionally get pushback from LPs who want me to concentrate further on a particular industry. In response, I share our sector interests, and disclose that these might change across vintages as new opportunities emerge and others ebb. And I disclose one of my most contrarian VC takes - that it’s better for early stage VCs to specialize in types of people, not just types of spaces.

Because buzzwords come and go, and spaces rise and fall. But talent will always rule the day.

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What’s on my browser this week

• Beautiful, beautiful, beautiful. Brava to this gem of an OpEd.

• Iconic! For Apple’s 50th anniversary, the folks at Sequoia shared Don Valentine’s original 1977 investment memo for his first check into Apple Computer.

• First TBPN, now MTS. I seriously would like to know, who has the time to watch, read and listen to all this stuff??

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Until next time 👋