Last month, one of the better known venture capital firms in the Bay Area, Uncorking capitalcelebrated its 20th anniversary with a party at a renovated church in San Francisco’s SoMa neighborhood, where 420 guests showed up to help celebrate the company, swap tips and share war stories.
There is no doubt that the venture scene has changed significantly since Uncork was founded. When the company’s founder, Jeff Clavier, launched the company, he mainly 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, jointly oversee billions of dollars in assets. If we zoom out, the entire industry has gotten a lot bigger. In 2004, venture capital firms poured about $20 billion into startups. In 2021, that amount reached a relatively staggering $350 billion.
As the size of the industry has changed, so have countless rules of the road – some for the better, some for the worse, and some because the original rules didn’t make much sense in the first place. On the eve of Uncork’s anniversary, we spoke to Clavier and its longtime managing partner, Andy McLoughlin, about some of those services.
At some point it became completely acceptable for full-time VCs to publicly invest their own money in startups. Previously, institutions that funded venture firms wanted partners to focus solely on investments for the company. Do you remember when things changed?
JC: Companies typically have policies to allow partners to invest in areas that are not competitive or that overlap with the company’s strategy. Let’s say you have a friend who is starting a business and needs cash; If the company ever decides to invest in future rounds, two things happen: Disclosure is needed [the firm’s limited partner advisory committee] by saying, “FYI, I was an investor in this company, I’m not the leader, I didn’t price the deal, there’s no crazy thing about me marking myself out here.” Some companies can do that too [force] you to sell investments in the round so that you have no conflict of interest.
Okay, so when did it become acceptable to support competing companies? I realize that this is still not the case wide accepted, but it is so more okay than it ever was. I spoke with an investor this week who has led late-stage 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 photo.
BEN: They’ll probably act like it’s okay, and they’ll continue to act that way until it’s not, and then it becomes a big problem. This is something we take very seriously. If we feel there is a potential conflict, we want to get ahead of it. We usually say to our own portfolio company, “Hey, look, we’re looking at this. Do you consider this competitive?’ Actually, we already brought this up this week. We think so [a] completely different [type of company]but we wanted to go through the steps and make sure everyone felt comfortable.
Honestly, if we had a company that was going to raise their Series A, I would never let them chat with a company that has a competing investment. I just think the risk of information leakage is too great.
Perhaps this particular situation shows how little control the founders have at this point. Perhaps VCs can get away with backing competitive investments now when they wouldn’t be able to at any other time.
BEN: Not many late-stage deals get done, so the founder may have had to go along with it because the deal was too good to pass up. There’s always so much dynamics at play that it’s hard to know what’s going on behind the scenes, but it’s something that personally makes me very uncomfortable.
Another change concerns the seats on board, which have long been seen as a way to underline the value of a company (or investment) in a startup. But some VCs have become very vocal advocates of not taking them, arguing that investors can get a better view of companies between board meetings.
JC: It’s your fiduciary duty to actually pay attention and help, so I find that statement ridiculous. I’m sorry. That is our job, to help companies. If you have a major stake in the company, it is your job and your responsibility [to be active on the board].
BEN: A bad board member can be a dead weight for the company. But we’ve been fortunate to work with really great board members who participated in Series A, B and C, and we just see the incredible impact they can have. For us, if we create a board in the seed phase, we will take the board seat if necessary and go through Series B and then leave at that point to give up our seat to someone else, because the value we can provide upfront from that zero to one phase is very different from what a company needs as it goes to $10 million, $50 million to $100 million [in annual revenue]. We like to still be in the room as spectators; we want to stay very close to the companies. But ultimately, just as a CEO should think about upgrading his management team as the company matures, the same goes for the company’s governance. For companies that need guidance, board seats are still very important.
Now that the exit market has stalled somewhat, are you finding that you are spending longer on the board, and is that limiting your ability to get involved with other companies?
BEN: It probably has less to do with the exits and more to do with late-stage rounds. If the companies don’t raise the Series Bs and Cs, then we’ll be on those boards longer. It’s a consequence of the financing markets being what they are, but we’re seeing things starting to pick up again.
The other thing that happened was during the crazy times [of recent years]Then we’d find that these late-stage crossover funds would run a Series B or maybe even a Series A, but they’d say, ‘Look, we’re not taking any board seats.’ As a seed investor, we therefore had to stay longer. Now that those same companies are no longer doing these deals and more traditional companies are backing the Series A and B rounds, they are taking those seats back.
Andy, we spoke last summer when there was still a lot of money going around with seed rounds. At the time you predicted a contraction in 2024. Did that happen?
BEN: There are still a lot of seed funds out there, but a lot of them are starting to get to the end of their fund cycle, and they’re starting to think about fundraising. I think the rude awakening is a lot [of them] what we’re facing is the sources of capital that were very willing to give them cash in 2021 or even 2022 – a lot of that is gone. If you were to raise money primarily from high-net-worth individuals – sort of non-institutional LPs – it just becomes very difficult. So I think the number of active seed funds in North America will increase from, let’s call it 2,500 today, to 1,500. I bet we’ll lose a thousand in the next few years.
Even now that the market is booming?
BEN: The market may be doing well, but what people don’t see is a lot of liquidity, and even wealthy individuals have a limited amount of money they can put to work. Until we see real money coming back – aside from the highs here and there – it’s just going to be tough.
What do you think of this AI wave and whether prices are rational?
JC: Too high prices happen, and [investing giant amounts] is not what we do at Uncork. A large seed round for us costs about $5 million or $6 million. We could stretch ourselves to $10 million, but that would be the maximum. So everyone is trying to figure out what investment makes sense, and how thick the layer of functionality and proprietary data you have to avoid being crushed by the next generation of technology. [large language model that OpenAI or another rival releases].
BEN: People have lost their minds about what AI means and almost forget that at the end of the day we are still investing in companies that need to be big and profitable in the long term. It’s easy to say, “Look, we’re going to hedge this and maybe we can find a place to sell this company to,” but honestly, many enterprise AI budgets are still small. Companies are dipping their toe in the water. They can spend $100,000 here or there on one [proof of concept]but today it is very unclear how much they will spend, so we have to look for companies that we think can be sustainable. The fundamentals of the work we do have not changed.
