Everyone Wants to be an Index
One of the first things you’ll realize/hear when you start to work in venture is that there are multiple ways to win. Styles of investment, pace, and ways of working all differ from firm to firm as well as from investor to investor. Some investors/firms are thesis driven - they dive incredibly deep on narrow view points of the world. They collect data, talk to experts, and conduct primary research to develop a differentiated viewpoint on a macro theme they see occurring. Some investors/firms are network driven - they cast a wide but curated net that allows them to develop relationships and reputations that reinforce their ability to identify the strongest potential opportunities. Regardless of the intended focus, my belief is that a lot of investors/firms fall somewhere in between. That being said, I’m starting to notice a trend at the earliest stages of venture capital. There are now multiple new to new-ish firms at the pre-seed - Series A level taking what I like to call the “index approach” pioneered by Y Combinator. The “index approach” of investing, to me, consists of having the following qualities:
A straight forward application process that casts a wide net
A clear/repeatable low lift value proposition for founders
A reputation/brand that doubles as a filtering mechanism for quality
The firms that I believe fit this category, or aspire to fit this category are the following (basketball analogies in parentheses because why not):
Y Combinator (the OG Hall of Famer)
Tiger Global (the back to back MVP (i.e 2016 Steph Curry))
On Deck (the Rookie of the Year)
Launch House (the Runner up to Rookie of the Year)
Prologue (the projected #1 Pick)
In my mind, the combination of the above qualities allow Y Combinator and the other firms to create an index of early stage startups. The differentiation between these firms and traditional VCs or accelerators is two fold. The main point of differentiation between traditional venture firms and the above is the sheer volume/velocity of startups they invest in. On the flip side, the main differentiation between accelerators namely comes down to brand, reputation, and the signaling they provide which by and large is a function of execution over time. I think about it this way:
There are ~4,000 public companies, but only 500 in our beloved S&P. A general accelerator, in my mind, will help the companies that they can. An “index approach” style of investing, helps the companies they want (i.e in this analogy the top 500) and that curation process becomes a signal for quality
In the same way that there is a difference between attending Harvard and attending John Hopkins, there is a difference between getting accepted by Y Combinator and other accelerators. Both are GREAT accomplishments in their own right, but there is still a demonstrable difference in the resources at your disposal and the access you will gain
To continue the college analogy, firms with an index approach have a process that is similar to applying to college with a Common App, while traditional VC firms have additional requirements (i.e interviews, supplemental SATs, etc). In either method both styles of investing are controlling for quality, the difference is at which point in the “application” process the funnel is tightened
Lastly, having a value proposition that is “low lift” and repeatable is representative and necessary to manage the number of companies that come with the territory of being an index. A traditional VC firm will deploy a lot of hands on resources over the lifetime of the company, a good example of this is taking a board seat. The above firms, deploying an index approach, largely provide capital and their ancillary resources at a specific point in time. Are they long term partners? Absolutely, they’re on the cap table. Are they going to be your first call when shit hits the fan and you need to figure things out FAST? Probably not.
In general, while I agree that accelerator programs tend to be the firms that most closely deploy an index approach to investing - I think about it more like a square/rectangle situation. Every index style of investing has accelerator like characteristics, but not every accelerator becomes an index of early stage startups.
Lastly, I’ll leave you all with this. Do I know where the future is headed in terms of venture capital? Nope. I’m learning alongside all of you. But, I do know where venture capital is at today. The industry is becoming more competitive, and venture firms are being forced to compete and specialize in new and different ways, which is a good thing. The bar is being raised for VC investors, and entrepreneurs are the ones who will win out.
In the meantime though.
Everyone wants to be an index.