The Evolving Landscape of Venture Capital Mindsets

After a decade of investing, I've been writing down a few notes for my team. I've no idea if there is broader interest in this stuff. Nor if it's particularly useful. But posting for those who have an interest in venture and appreciate perspectives on it.

The Evolving Landscape of Venture Capital Mindsets

“And what I'm interested in is investing in people.” — Arthur Rock

VC investing isn’t what it was. By that I mean, the majority of investment isn’t done by a loose partnership of generalists investing in emerging markets with speculative technology. Instead, tech markets have grown and matured, and the amount of capital available has kept pace, growing many orders of magnitudes in the last few decades. As a result, venture capital has professionalized with much of the activity coming from coordinated teams in large firms doing tremendous amounts of analysis, often in specific sectors. In fact, I’d wager most of that analysis isn’t about technology at all.

A major influence in this evolution of venture has been traditional finance and business. Which shouldn’t be a surprise. Early stage companies today are the size of public companies just a few decades ago. So using the same approach of evaluating a company from its metrics or the shape of the market it is going into is perfectly sensible.

However, evaluating a company based on its finances or the market can be contradictory to early stage tech investing. Tech waves nearly always precede figuring out the business models. Hell, we didn’t know how to monetize the Internet for years. And tech creates market and TAM so evaluating market shape is pointless.

Unfortunately many discussions about approaches to VC are a mishmash of the traditional tech focused, early market view and the more traditional finance mindset, and they end up being a muddled, incoherent mess. And worse, result in a muddled, incoherent investing process.

One way out of this morass is to define some of the more prevalent archetypal investment philosophies one finds in venture capital. And from there, when discussing a deal or fund strategy to use these as a backdrop on approach, rather than being a grab bag of justifications for or against an investment.

While in practice, most investment strategies are a blend of approaches, I find the the following four to most commonly be the predominant mindsets:

Archetypal Investment Philosophies

Financial: Financial investing is focused primarily on business financials and the shape of the target market. The throughline view is that the correct representation of the health of the asset is the finances. And its future prospects are largely dictated by the promise of the market. Justification for or against deals involves analysis of business metrics (churn, margin, growth, pricing power, NDR etc.). Another major consideration is the size of the market, and its accessibility to new entrants. TAM analysis is prominent. The reality is that with the maturity of computer science and software, there are many businesses that are in fact not differentiated by tech. In fact I would argue most vertical SaaS is not a hard technical problem. Under this lens I tend to think of financial investors as traditional business investors who happen to understand the tech market. Financial investors tend to focus on companies after there is traction, such as early Bs through growth. And areas where tech is not a primary differentiator. Further they tend to have sensitivity on price given they often back out the value of the company from metrics and TAM.

Productive: Productive investors believe tech is a market-creating productive asset. And investing in it will create net new value by creating new markets or expanding existing markets. Productive investors tend to focus on tech, team, market fit and view business metrics and markets as secondary or tertiary indicators. This is rational because business evolution historically lags technical evolution (we didn’t figure out the business model for the web for years!). Meanwhile, because it’s hard to time bound innovation and market maturation, productive investors de-emphasize the existing TAM if they consider it at all. Productive investors are also far less focused on “the deal”. While everyone appreciates a good price, the ultimate goal is simple access to and exposure in the leading technology companies that are going to create unbounded value in the future. Productive investing differs slightly from early VC frontier investing in that given the maturity of tech and tech markets, there is quite a bit of diligence work that can be done on the approaches and the markets. But generally these are techno-strategically oriented.

Frontier: Frontier investing mostly closely maps to the historical and romantic view of VC. With it, the ultimate productive asset are the founders and technologists. All new markets are possible, and just out of sight of the rest of us. The goal is to invest in new tech and business innovation well before anything is working. Frontier investing tends to be the most founder centric. Effectively if good founders are interested in a space, the space must hold some interest, because founders are smarter than markets or investors. So frontier investing ends up looking a bit like a talent agency. Just find the best founders exploring wildly new spaces and back them. In a way, frontier investing is investing in visions of the future. Every trope from science fiction, each speculative tech subreddit, hobbyist projects from top technologists. A common approach to frontier investing is simply taking market risk. That is, do the diligence to back the best team in a given space. But don’t worry too much about whether the market emerges or not. The rationale is you can’t predict the future, but you can diligence a team.

Speculative: While rare for traditional venture capital, some of the assets we invest in do also attract speculative capital such as crypto token investors and parts of the secondary market. In general, speculative investors don’t have much visibility into the underlying asset so are investing in the market’s perception of the deal. Speculative investing puts heavy emphasis on price, and macro markets. Further, speculative investing often considers financial market timing. As a result, it’s not unusual for speculative investors to go in and out of markets. Because the focus is on the value of the deal relative to the market and less on the company or technology itself, speculative investors often are quite general across areas and stage.

Are these Categories Real?

No. They’re idealized. And I don’t know of anyone or any firm who adheres strictly to any of them save some purely speculative outlets. But having been involved in many hundreds of deals I do believe they represent common views and justifications investors draw upon when making decisions. And I’ve found it to be a useful device to both understand how someone is thinking about a deal. And to guide conversations. For example, it’s hard to directly refute a finance argument with a product argument since they make entirely different assumptions on what the bet is for value creation. So the point of highlighting these is to help navigate discussions. And hopefully avoid inconsistent beliefs when thinking through investment strategies.

The Grab Bag Trap

Each of the philosophies above is based on a coherent view of how to evaluate a deal.

And perhaps with the exception of very early stage companies, the best investments look good under all the philosophies. For example, the tech is new and differentiated, the market is large and growing fast. The metrics are good, the team is great and the price is below market. However, most deals aren’t this straight forward. And so the investor has to draw on some core systematic base to reason about how to evaluate it.

So the grab bag trap appears when these aren’t viewed as coherent investing strategies, but as piece parts to either justify or argue against a deal. Because at times these strategies are conflicting. For example, if you invest in emerging tech, it makes little sense to overrotate on business metrics or TAM. If you’re a productive investor and don’t believe in the underlying company, it makes little sense to invest because you’ve found a “good deal”. And if you truly believe a technology is revolutionary TAM concerns should be third order at best. On the other hand a mistake we make often is to overrotate on the technical background or approach of a founding team with incredible business metrics. It’s not that any of these are invalid objections to investing. But given that most investments make *some* assumption based on some belief of value, it’s important that the objections are consistent with those beliefs.

Unfortunately there is no systematic answer on how to navigate the tensions between these philosophies. In the end I would recommend having a core philosophy as an investment team or fund and sticking to those beliefs across deals so that the grab bag isn’t ad hoc applied to fulfill personal bias. A common approach is evolving the philosophy by stage (pre product: frontier, pre traction: productive, and post repeatability: financial). And at least call out the times these beliefs are contrary to when the investment is happening.

Investment Philosophy and Stage

There is an obvious alignment between investing philosophy and stage. To wit, nearly all first money in checks are frontier investing and primarily about team, or at best team and approach relative to the market. Financial investing clearly has more applicability for later stages, and growth investing is almost entirely through this lens. However, things are less clear from seed to early Cs where the business hasn’t quite gotten to the point of long term repeatability. Or the market is still uncertain. There are many examples of companies that took years to break out. So with rare exceptions I’d caution against blanket application of a philosophy just on stage.

Infra Investing

As for my philosophy. I’m strictly a productive investor. I’ve always found Speculative and Financial investing to be an odd fit for early stage infrastructure investing. They tend to discount the massive value created by tech and instead take a zero sum mindset where upside is limited by existing market size or business models. Underappreciating TAM expansion is so common it’s almost become a cliche – Uber and taxis, Github and the repository, Cursor and the IDE and so on. And I find it almost paradoxical to look for disruptive tech, and then evaluate it via mature space indicators like traditional business metrics. On the other hand, having a formal technical background, and having done a product startup and operated at scale, I do find value in evaluating a company's approach, the target market, and the founders’ views on building a company within that. The market is large and mature enough to afford some diligence, even if that isn’t strictly waiting for the business to work.

Final Thoughts

The point of this post is to provide a framework to aid in discussions around investing, and in particular deal discussions. In the deal room, you can argue for or against any deal drawing from snatches of these philosophies. But unless it’s done in a coherent fashion it doesn’t help drive to better outcomes. So figure out where your core beliefs are, and visit them often in your own reasoning. It really is one of the very few ways we can add structure to this job that’s primarily dealing with unknowns.

Figure out where your core beliefs are, and visit them often

By Martin Casado