Last month, a Bay Area’s better-known early-stage venture capital firm, Uncork Capital, marked its 20th anniversary with a party in a renovated church in San Francisco’s SoMa neighborhood. 420 guests showed up to help the firm celebrate, trade tips, and share war stories.
There’s no question the venture scene has changed meaningfully since Uncork got its start. When founder Jeff Clavier launched the firm, he mainly used his savings to write six-figure checks to founders. Clavier and his contemporaries oversee billions of dollars in assets, including Josh Kopelman of First Round Capital and Aydin Senkut of Felicis. Zooming out, the whole industry has gotten a whole lot bigger. In 2004, venture firms plugged roughly $20 billion into startups. In 2021, that amount reached a comparatively jaw-dropping $350 billion.
As the industry’s scale has changed, numerous road rules have changed, too—some for better some for worse, and some because the original rules didn’t make much sense in the first place. On the eve of Uncork’s anniversary, we discussed some of those shifts with Clavier and his managing partner of many years, Andy McLoughlin.
At some point, it became entirely acceptable for time VCs to publicly invest their money in startups. Previously, institutions funding venture firms wanted partners to focus solely on investing for the firm. Do you recall when things changed?
JC: Firms typically have policies to let partners invest in things that aren’t competitive or that overlap with the firm’s strategy. Let’s say you have a friend who starts a company and needs cash; if ever the firm decides to invest in future rounds then two things: there is a disclosure necessary to [the firm’s limited partner advisory committee] saying ‘FYI, I was an investor in this company, I’m not lead, and I did not price the deal and there is no funny business where I’m marking myself up here.’ Also, some e-firms may [force] you to sell investment into the round so you don’t have a conflict of interest.
Okay, and when was it acceptable to back competing companies? I realize this still isn’t widely accepted, but it’s more acceptable than it once was. I talked this week with an investor who has led later-stage deals in pretty direct HR competitors. Both companies say it’s fine, but I can’t help thinking there’s something wrong with this picture.
AM: They’re probably acting like it’s okay, and I’ll continue to act that way until it’s not, which will be a big problem. This is something we take very seriously. If we feel like there’s any potential conflict and want to get ahead of it. We’ll typically say to our portfolio company, ‘Hey, look, and we’re, looking at this thing. Do you see this as competitive?’ We had this come up this week. We think it’s actually [a] very different [type of company] but we wanted to go through the steps and make everybody feel comfortable.
If we had a company going out to raise their Series A I would never have them chat with a firm with a competing investment. The risk of information leakage is too significant.
This particular situation may speak to how little control founders have right now. Maybe VCs can get away with backing competing investments right now, whereas at another moment, they couldn’t.
AM: Only a few late-stage deals are getting done, so the founder had to swallow it 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 the kind of thing that makes me very uncomfortable.
Another change centers on board seats, which were long viewed as a way to underscore a firm’s value—or investment—in a startup. However, some VCs have become vocal advocates of not taking them and argue that investors can gain better company visibility during board meetings.
JC: It’s your fiduciary duty to pay attention and help, so I find that statement ridiculous. I’m sorry. That is our job to help companies. If you have a significant stake in the business it’s your job and responsibility [to be active on the board].
AM: A wrong board member can be a dead weight on the business. But we’ve been lucky enough to work with fantastic board members who joined Series A, B, and C, we see the incredible impact they can have. If we create a board at the seed stage and we’ll take the board seat if needed. We’ll be on through Series B. We’ll roll off at that point to give our seat to somebody else because the value we can provide upfront from that zero to one phase is very different from what a company needs when it’s going to $10 million to $50 million to $100 million [in annual revenue].
With the exit market somewhat stuck, are you finding you’re on boards longer, and does that limit your ability to get involved in other companies?
AM: It’s probably less to do with the exits and more with later-stage rounds. If the companies aren’t raising Series Bs and Cs, we will be on those boards for longer. It’s a consequence of the funding markets being what they are but we are seeing things to begin to pick up again.
The other thing that happened was during the crazy times [of recent years], we’d find these late-stage crossover funds leading a Series B or maybe even a Series A, but they’d say, ‘Look, we don’t take board seats.’ So, as the seed investor, we had to stay on longer. Now that those same firms aren’t doing those deals, more traditional firms are backing Series A and B rounds. They’re retaking those seats.
AM: There are still a lot of seed funds out there, but many of them are beginning toward the end of their fund’s cycle, and they’re going to be thinking about fundraising. I think the rude awakening that a lot [of them] are in for is the sources of capital that had been very willing to give them cash in 2021 or even 2022 – a lot of that has gone away. If you are raising primarily from high-worth individuals – noninstitutional LPs – it will be tough. So I do think the number of active seed funds in North America is gonna go from and let’s call it 2 and500 today to 1 and500. I bet we lose 1,000 over the next few years.
Even with the market booming?
AM: The market can be doing well but people aren’t seeing a lot of liquidity and even high net worths have a finite amount of cash that they can put to work. It will be hard until we start seeing real cash coming back – beyond the highlights here and there.
How are you feeling about this AI wave and are prices rational?
JC: A lot of overpricing is happening and [investing giant amounts] differs from what we do at Uncork. A large seed round for us is about $5 million or $6 million. We could stretch ourselves to $10 million, but that would be the maximum. So everybody’s trying to figure out the investment that makes sense and how thick of a layer of functionality and proprietary data you have to avoid being crushed by the next generation of [large language model that Open AI or another rival release].
AM: People have been losing their minds around what AI means and almost forgetting that we’re ultimately still investing in long-term businesses that must be large and profitable. It’s easy to say, ‘Look, and we’re gonna hedge this, and maybe we can find a place to sell this business into,’ but honestly, many enterprise AI budgets are still small. Companies are dipping their toe in the water. They might spend $ 100,000 here or there on a [proof of concept], but it’s very unclear today how much they will pay, and so we have to look for businesses that we think can be durable. The fundamentals of the job that we’re doing haven’t changed.
