Last month, one of the Bay Area’s best-known early-stage venture capital firms, Uncork Capitalcelebrated its 20th anniversary with a party at a converted church in San Francisco’s SoMa neighborhood, where 420 guests showed up to help the company celebrate, swap tips and share war stories.
There’s no doubt that the venture scene has changed significantly since Uncork started. When company founder Jeff Clavier started the company, he mostly used his savings to write six-figure checks to the founders. Now Clavier and his contemporaries, including Josh Kopelman of First Round Capital and Aydin Senkut of Felicis, collectively oversee billions of dollars in assets. By shrinking, the entire industry has become much larger. In 2004, venture capital firms allocated approximately $20 billion to startups. In 2021, that amount has reached a comparatively impressive $350 billion.
As the scale of the industry has changed, many rules of the road have changed as well — some for the better, some for the worse, and some because the original rules didn’t make much sense to begin with. On the eve of Uncork’s anniversary, we spoke to Clavier and his longtime manager, Andy McLoughlin, about some of those changes.
At some point, it became perfectly acceptable for full-time VCs to publicly invest their own money in startups. Previously, institutions funding venture firms wanted partners to focus solely on investing for the firm. Do you remember when things changed?
JC: Companies usually have policies that allow partners to invest in things that are not competitive or that overlap with the company’s strategy. Let’s say you have a friend who is starting a company and needs cash. If the company ever decides to invest in future rounds, then two things: there is required disclosure [the firm’s limited partner advisory committee] saying “FYI, I was an investor in this company, I’m not the leader, I didn’t price the deal, there’s no funny business where I’m branding myself here.” Also, some companies may [force] sell the investment in the round so you don’t have a conflict of interest.
So when did supporting competing companies become acceptable? I realize this is still not largely acceptable, but it is more ok than it once was. I spoke this week with an investor who has led to subsequent deals in fairly direct HR competitors. Both companies say it’s fine, but I can’t help but think there’s something wrong with this picture.
I AM: They probably act like they’re fine and will continue to act that way until they’re not, and then it’s going to be a big problem. This is something we take very seriously. If we feel there is a potential conflict, we want to prevent it. Usually we’ll say to our own holding company, “Hey, look, we’re looking at this thing. Do you see this as competitive?’ We really had that theme this week. We think it actually is [a] very different [type of company]but we wanted to go through the steps and make everyone feel very comfortable.
Frankly, also, if we had a company coming out to raise their Series A, I would never have them talk to a company that has a competing investment. I just think the risk of information leakage is too great.
Perhaps this particular situation speaks to how little control the founders have right now. Maybe VCs can get away with backing competing investments now, when at another time they couldn’t.
I AM: Not many late-stage deals happen, so it could just be that the founder swallows them because the deal was too good to pass up. There are always so many dynamics at play, it’s hard to know what’s going on behind the scenes, but it’s something that makes me personally very uncomfortable.
Another change centers on ship positions, which have long been seen as a way to underline a company’s value – or investment – in a startup. However, some VCs have become very vocal advocates of not taking them, arguing that investors can get better visibility into companies between board meetings.
JC: It is your fiduciary duty to actually pay attention and help, so I find this statement ridiculous. Sorry. That’s our job, to help companies. If you have a large stake in the business, it is your job and responsibility [to be active on the board].
I AM: A bad board member can be a dead weight for the business. But we’ve been fortunate enough to work with some really amazing board members who have joined Series A and Series B and Series C, and we’re just seeing the incredible impact they can have. For us, if we create a board at the seed stage, we will take the board seat if needed and continue to row B and leave at that point to give our seat to someone else because The value we can provide from upfront from that zero-to-one phase is very different than what a company needs when it comes to getting to $10 million to $50 million to $100 million [in annual revenue].
As the exit market is kind of stuck, do you find yourself on boards more and does that limit your ability to get involved with other companies?
I AM: It probably has less to do with the exits and just more to do with the later stage rounds. If companies don’t raise Series B and C, then yes, we’ll be on these boards for longer. It’s a consequence of the funding markets being what they are, but we’re seeing things start to pick up.
The other thing that happened was in crazy times [of recent years], we would find that these crossover stage funds would lead to a Series B or maybe even a Series A, but they would say, “Look, we’re not taking board seats.” Therefore, as an early investor, we had to stay longer. Now that the same companies aren’t doing those deals and more traditional companies are backing Series A and B rounds, they’re taking those positions again.
Andy, we talked last summer when there was still a lot of money coming in around seed. Back then, you predicted a contraction in 2024. Has that happened?
I AM: There are still a lot of seed funds out there, but many of them are starting to reach the end of their funding cycle and will be thinking about fundraising. I think the rude awakening is too much [of them] it’s the sources of funds that were very willing to give them cash in 2021 or even 2022 – many of them are gone. If you were mainly raising from high net worth individuals – some non-institutional LPs – it’s going to be very difficult. So I think the number of active seed funds in North America will go from, let’s call it 2,500 today, to 1,500. I bet we lose 1,000 in the next few years.
Even with the booming market?
I AM: The market may be doing well, but what people don’t see is a lot of liquidity, and even high net worths have a finite amount of cash they can put to work. Until we start seeing real cash coming back – beyond highlights here and there – it’s just going to be tough.
How do you feel about this AI wave and if the prices are reasonable?
JC: A lot of overcharging happens and [investing giant amounts] that’s not what we do at Uncork. A large seed round for us is like $5 million or $6 million. We could expand to $10 million, but that would be the maximum. So everyone is trying to figure out what investment makes sense and how thick a layer of functionality and proprietary data you have to avoid being crushed by the next generation [large language model that OpenAI or another rival releases].
I AM: People have lost their minds about what AI means and almost forget that ultimately we are still investing in businesses that, in the long run, need to be big and profitable. It’s easy to say, “Look, we’ll hedge this and maybe we can find a place to sell this business,” but frankly, a lot of enterprise AI budgets are still small. Companies are dipping their toe in the water. They might spend $100,000 here or there on one [proof of concept]but it is very unclear today how much they will spend, so we need to look for businesses that we believe can be resilient. The core elements of the work we do have not changed.
