Last month, Uncork Capital, one of the Bay Area's most prominent early-stage venture capital firms, celebrated its 20th anniversary with a party in a converted church in San Francisco's SoMa district, where 420 guests gathered to help and celebrate the company, swap advice and share stories of hardship.
There's no doubt that the venture industry has changed a lot since Uncork started. When founder Jeff Clavier started the company, he mostly used his savings and wrote six-figure checks to founders. Now Clavier and his colleagues, including Josh Kopelman at First Round Capital and Aydin Senkt at Felicis, collectively manage billions of dollars in assets. To put it in perspective, the industry as a whole is much bigger: In 2004, venture firms pumped about $20 billion into startups. In 2021, that figure has reached a relatively astonishing $350 billion.
As the industry has changed in size, many of the rules have changed too. Some for the better, some for the worse, and some because the original rules no longer made much sense. Ahead of Uncork's 15th anniversary, we spoke with Clavier and longtime managing partner Andy McLoughlin about some of those changes.
At some point, it became perfectly acceptable for full-time venture capitalists to publicly invest their own money in startups. Previously, venture funding institutions wanted their partners to focus solely on investing in companies. Do you remember when things changed?
JC: Firms usually have a policy that allows partners to invest in things that are not competitive or overlap with the firm's strategy. For example, say you have a friend who is starting a company and needs capital. If the firm decides to invest in a future round, two things happen: [the firm’s limited partner advisory committee] “For your information, I was an investor in this company, but I wasn't the lead, and I didn't set the deal price. I'm not doing anything shady here by inflating the price,” he said. [force] Investment rounds must be sold to avoid creating conflicts of interest.
So when did it become acceptable to back your competitors? I know it's still not widely accepted, but it's becoming more so. I spoke with an investor this week who led a late-stage deal at a pretty direct HR competitor, and while both companies say it's fine, I can't help but feel like there's something wrong with this situation.
AM: They're probably acting like it's OK, and they're going to continue to act that way until it becomes a problem, and then it becomes a big problem. This is something that we take very seriously. If we think there's a potential conflict, we want to be proactive and address it. We typically say to our portfolio companies, “Hey, we're looking at this, do you think this is competitive?” In fact, this conversation came up this week. We said this is actually [a] Very different [type of company]But we wanted to take steps and make sure everyone felt comfortable.
To be honest, if I had a company looking to raise a Series A, I would never talk to a company that has competing investments because I think the risk of exposure is too great.
Perhaps this particular situation speaks to how little control founders currently have. Perhaps VCs are OK with backing competing investments now, but not at another time.
AM: There aren't a lot of later stage deals, so it may just be that the founders were forced to take the deal because it was too good to pass up. There are always a lot of different dynamics at play, so it's hard to know what's going on behind the scenes, but it's very uncomfortable for me personally.
Another change has been around board seats. Board meetings have long been seen as a way to highlight a company's value, or investment, in startups. But some VCs have become vocal about not sitting on boards, arguing that investors can get to know a company better between board meetings.
JC: It's your fiduciary responsibility to actually pay attention and support. So I think that statement is absurd. Sorry. It's our job to support businesses. If you have a big stake in that business, then that's your job and your responsibility. [to be active on the board].
AM: Bad board members can be a drag on a business, but we've been fortunate to work with some really great board members who joined at Series A, B, and C, and we've seen the impact they can have. For us, if we create a board at the seed stage, we'll sit on the board if necessary, and stay until Series B, at which point we'll step down and make the seat available to someone else, because the value you can provide up front from zero to one is totally different than what a company needs as it grows to $10M, $50M, or $100M. [in annual revenue].
With the retirement market being somewhat sluggish, do you feel like you're staying on boards longer and that limits your ability to get involved with other companies?
AM: It probably has less to do with exits and more to do with later rounds. If a company isn't raising a Series B or C, then certainly we're staying on that board longer. This is due to the current state of the funding market, but things are starting to pick up again.
Another incident occurred during the Madness Period. [of recent years]Late-stage crossover funds are leading Series Bs, or even Series As, and they say, “We're not going to have a seat at the board.” So as seed investors, we had to hang on longer. Now, as those same companies are no longer doing those deals and more traditional companies are backing Series A and B rounds, they're starting to have a seat at the board again.
Andy, we spoke last summer when there was still a lot of money flowing in your seed round, and at the time you predicted a wind down in 2024. Has that happened?
AM: There are still a lot of seed funds out there, but many of them will be nearing the end of their fund cycle and will be thinking about raising more money. [of them] The problem they face is that the capital sources that were willing to give them money in 2021, or even 2022, are almost all gone. If you were raising money primarily from high net worth individuals, non-institutional LPs, that's going to be very tough. So I think the number of seed funds operating in North America will go from 2,500 today to 1,500. We'll lose 1,000 over the next few years.
Even though the market is booming?
AM: The markets may be doing well, but what people don't see is how liquidity is. And even the highly wealthy have a limited amount of cash they can put to work. There are highlights here and there, but until we start to see real cash coming back, it's going to be tough.
How do you feel about this wave of AI and do you think the price is reasonable?
JC: Overpricing is happening a lot. [investing giant amounts] That's not the case with Uncork. A big seed round for us is $5 million or $6 million. We could stretch that to $10 million, but that's the max. So everybody's trying to think about what is a meaningful investment and how thick do we need to layer in capabilities and proprietary data to avoid getting crushed by the next generation of companies. [large language model that OpenAI or another rival releases].
AM: People are struggling to wrap their heads around what AI means and forgetting that they're investing in a business that will be scalable and profitable in the long run. It's easy to say, “Let's hedge this, let's find a place where we can sell this business,” but honestly, a lot of companies' AI budgets are still small. Companies are just dipping their toes in AI. They spend $100,000 on AI and… [proof of concept]But right now it's very unclear how much they're going to spend, so we have to look for businesses that we think will be sustainable. The fundamentals of the work we do haven't changed.