The "time to build" for LPs & banded returns in software companies & unlocking talent in the private markets

To quote Marc Andreessen’s recent call to arms:

What are you building directly, or helping other people to build, or teaching other people to build, or taking care of people who are building?

For limited partners with infinite time horizons, it’s surprisingly easy to fall into short-term games. We’re human, it’s our nature. We face constant pressure to invest without creativity or conviction—to become trapped on the fundraising treadmill, only committing to legacy brands and existing relationships that haven’t met expectations.

Crises force introspection, and it’s fair to expect limited partners to re-evaluate how we build. This current crisis has broken that fundraising treadmill, creating an opportunity for change: to avoid the fear-of-missing-out games played by shorter-term participants and to instead approach potential investments with longer-term mindsets.

There’s much we can do to change how we build. Lay the foundation to proactively meet other investors, forming relationships over time. Take every opportunity to top-grade our portfolios, investing with the strongest of those new relationships, and sunsetting the existing relationships where the risks outweigh the future returns. Help create solutions for problems those new relationships are working to invest behind and solve. Get to know the next generation of investors before everyone else. And, treat our portfolios like artwork, and acknowledge they’re never finished. Counterintuitively, keeping our eyes on the horizon will allow us to react to coming changes more quickly than our counterparts focused on the immediate.

It’s impossible to say what the outcomes of our actions in this current crisis will be, let alone those of other investors and market participants. However, I believe by re-orienting our view towards the longer-term the score will ultimately take care of itself. On the other side of this crisis we’ll be even better positioned to build, and to support other great investors as they build.

What I’ve read recently:

  • When Tailwinds Vanish. John Luttig writes that “Once Sand Hill Sachs exists, it will become clear that VC dollars should be reserved for R&D, not S&M or G&A.” I believe venture capital shines when applied towards capital-inefficient problems. Eye-popping outcomes may still happen in enterprise software or the consumer internet, but as value levers become better understood in those spaces the potential returns will become far more banded. Investors who’ve previously thought of themselves as venture capitalists may need to shift towards more capital-inefficient areas: to earlier and earlier stages, or frontier technologies. Or, they can rethink their toolboxes and become more creative in the solutions they provide companies.

  • $1 trillion in equity: How Carta is set to unlock the private markets. The rise of Carta is pushing the mid to late stages of venture capital towards a future with even more efficient price discovery. I wouldn’t describe the platform as a headwind for its customers given the value it provides them, but it’s potentially a strong tailwind for the talent at those companies. To re-phrase Arjun Sethi and the Tribe Capital team’s argument, Carta may unlock the private labor markets, allowing for both more fluid talent movement between companies and company creation itself. And in providing those on- and off-ramps for equity ownership, more value will accrue to Carta for serving as the gateway of record.

Enjoy the rest of the weekend. I’ll be trying to make a larger dent into Dune (as Preeti Singh at the WSJ reported), probably as I over-play the song below.