Great piece. One aspect of this topic that I would have loved to get your take on is the difference between the two in terms of accrual of structural advantage over time and how much of that is due to institutionalism of the firm that typically comes from long-term partnerships.
In fact, I'd argue that's one reason some LPs prefer to invest in GP partnerships rather than solo GPs.
Hey Waleed, yes, I tried to touch on this in the piece... I do believe it's easier to accrue structural advantages over time with a partnership, and harder to do so in a solo capitalist model. It's unlikely that a solo capitalist firm outlives the founder, unless there is serious succession planning in advance of retirement. Some LPs will not back solo capitalists or sole GPs as a result of this, but other LPs like the model because it means they're not committing to a fund for 15 funds and the next 50 years, and will definitely be exiting the commitment at some point! + some of the other reasons I brought up in this essay.
Thanks for writing this Nikhil! I have been following your articles and I am not sure if I had missed this. But, I wonder why firms like Flagship Pioneering, DVx ventures are rare to find in VC ecosystem? I often hear that VCs are looking for deal flows, founders with a vision who already have an idea. But I hear less on scenarios where the VC's have a vision about a particular market and they encourage people to build on their vision to start with. I know about DVx (from what I hear atleast because I don't work there), that they raise capital and build inhouse products with a team on ideas they brainstorm internally. I am aware there is EIR programs but those happen to be like 1 or 2 people in the whole traditional VC firm. Would love to hear your thoughts on this!
Hey Deepti, there are a few firms such as the ones you mentioned, and others such as Atomic, Juxtapose, Redesign Health and of course Sutter Hill Ventures that incubate and build companies in-house. The advantages of this model are truly proprietary sourcing (creating the companies themselves!), and high ownership of the companies. The disadvantages are they require a lot of work on the help front, and actually building the team out for these businesses. If they're not founder-led companies, they may have perhaps a lower chance of becoming a truly enormous company (most of the $100B+ companies in tech were founder-CEO led for a long time, or still are). But, there are increasingly more of these firms that solely focus on building companies.
Thank you! My takeaway from your reply is that its a lot of work to have venture firms start as well sponsor companies. I wonder if this could be this could be a good next big thing topic for you. :)
Vlad, haven't yet done it, project for a different day! But a few more to add to my original list - Minal Hasan, Zach Coelius, Addie Lerner, Ashmeet Sidana, Alice Lloyd George - who all roughly fit my reasonably strict definitions.
In light of recent news and COVID spiking, I'm curious how succession (due to death/disability) works in the case of solo capitalists. As an industry focused on high-impact, low-probability events this is the one that I haven't seen talked about. I would assume LPs want some sort of "key man" clause but how does this work from a founder's point of view? The worry of course is that you can end up with someone completely different on your cap table...not to be morbid, but 2020 right?
Good question Jeff. I'm not an expert on this, but I think the short answer is if a key person leaves the firm or dies or is unable to fulfill their duties then the LP base can force a firm to cease activity. Sometimes there's a nominee to fulfill duties in that case, but usually it would lead to a firm wind down.
There's one thing I would add here - as I'm going through the fund raising process, I realized that one key help I can immediately get is very warm intros from one investor to another after the prior committed to the round. I found my lead investor (a firm) through a solo capitalist (honestly a little shame on me as I should know enough people/firms from my own past VC experience) and the lead introed me to most of the investors (monetarily speaking) for the rest of my round. There are definitely more investors (headcount-wise) in this round that are through my network but it does make me realize sometimes check size can make a pretty noticeable difference and leads to different preference.
Yeah totally. And I found that I have a not-well-justified preference on bigger checks as I can just close the round faster with fewer conversations, which makes my life easier and allows me to focus back on building sooner. There's definitely obvious pros and cons in this preference :P
The path to become ''Solo Capitalist" in most of the cases passes through the "VC route" because LPs need to have the required trust, past outcomes. In the recent times, there are many examples of successful VC leaders starting on their own ..
Vadiraj, this is one of the things that I have observed change in the past couple of years. A bunch of the solo capitalists have never worked at traditional VC firms. They've made angel investments, and they have advantages across find/decide/win/help/exit to be able to fundraise from LPs, but a bunch don't have the traditional track record of an institutional investor.
Great piece. One aspect of this topic that I would have loved to get your take on is the difference between the two in terms of accrual of structural advantage over time and how much of that is due to institutionalism of the firm that typically comes from long-term partnerships.
In fact, I'd argue that's one reason some LPs prefer to invest in GP partnerships rather than solo GPs.
Hey Waleed, yes, I tried to touch on this in the piece... I do believe it's easier to accrue structural advantages over time with a partnership, and harder to do so in a solo capitalist model. It's unlikely that a solo capitalist firm outlives the founder, unless there is serious succession planning in advance of retirement. Some LPs will not back solo capitalists or sole GPs as a result of this, but other LPs like the model because it means they're not committing to a fund for 15 funds and the next 50 years, and will definitely be exiting the commitment at some point! + some of the other reasons I brought up in this essay.
Awesome post Nikhil! I agree it's about identifying your model's strengths and weaknesses and then playing your strengths very hard!
Thanks for writing this Nikhil! I have been following your articles and I am not sure if I had missed this. But, I wonder why firms like Flagship Pioneering, DVx ventures are rare to find in VC ecosystem? I often hear that VCs are looking for deal flows, founders with a vision who already have an idea. But I hear less on scenarios where the VC's have a vision about a particular market and they encourage people to build on their vision to start with. I know about DVx (from what I hear atleast because I don't work there), that they raise capital and build inhouse products with a team on ideas they brainstorm internally. I am aware there is EIR programs but those happen to be like 1 or 2 people in the whole traditional VC firm. Would love to hear your thoughts on this!
Hey Deepti, there are a few firms such as the ones you mentioned, and others such as Atomic, Juxtapose, Redesign Health and of course Sutter Hill Ventures that incubate and build companies in-house. The advantages of this model are truly proprietary sourcing (creating the companies themselves!), and high ownership of the companies. The disadvantages are they require a lot of work on the help front, and actually building the team out for these businesses. If they're not founder-led companies, they may have perhaps a lower chance of becoming a truly enormous company (most of the $100B+ companies in tech were founder-CEO led for a long time, or still are). But, there are increasingly more of these firms that solely focus on building companies.
Thank you! My takeaway from your reply is that its a lot of work to have venture firms start as well sponsor companies. I wonder if this could be this could be a good next big thing topic for you. :)
You mentioned during a podcast that you'd also update the list of solo GP's. Will you do that in a future post or can you add the list here?
Vlad, haven't yet done it, project for a different day! But a few more to add to my original list - Minal Hasan, Zach Coelius, Addie Lerner, Ashmeet Sidana, Alice Lloyd George - who all roughly fit my reasonably strict definitions.
Thanks Nikhil!
In light of recent news and COVID spiking, I'm curious how succession (due to death/disability) works in the case of solo capitalists. As an industry focused on high-impact, low-probability events this is the one that I haven't seen talked about. I would assume LPs want some sort of "key man" clause but how does this work from a founder's point of view? The worry of course is that you can end up with someone completely different on your cap table...not to be morbid, but 2020 right?
Good question Jeff. I'm not an expert on this, but I think the short answer is if a key person leaves the firm or dies or is unable to fulfill their duties then the LP base can force a firm to cease activity. Sometimes there's a nominee to fulfill duties in that case, but usually it would lead to a firm wind down.
There's one thing I would add here - as I'm going through the fund raising process, I realized that one key help I can immediately get is very warm intros from one investor to another after the prior committed to the round. I found my lead investor (a firm) through a solo capitalist (honestly a little shame on me as I should know enough people/firms from my own past VC experience) and the lead introed me to most of the investors (monetarily speaking) for the rest of my round. There are definitely more investors (headcount-wise) in this round that are through my network but it does make me realize sometimes check size can make a pretty noticeable difference and leads to different preference.
Thanks for sharing, MK! Great point on how fundraisings relate to one another. This is also why “who the lead is” matters.
Yeah totally. And I found that I have a not-well-justified preference on bigger checks as I can just close the round faster with fewer conversations, which makes my life easier and allows me to focus back on building sooner. There's definitely obvious pros and cons in this preference :P
The path to become ''Solo Capitalist" in most of the cases passes through the "VC route" because LPs need to have the required trust, past outcomes. In the recent times, there are many examples of successful VC leaders starting on their own ..
Vadiraj, this is one of the things that I have observed change in the past couple of years. A bunch of the solo capitalists have never worked at traditional VC firms. They've made angel investments, and they have advantages across find/decide/win/help/exit to be able to fundraise from LPs, but a bunch don't have the traditional track record of an institutional investor.