Interview, Fireside Chat
Can You Still Win in Venture Without a $1BN Fund? Menlo’s Venky Ganesan on the New Rules of VC
- The firm pursues an aggressive "go for broke" strategy aimed at defining the AI era, seeking to participate in seed rounds ranging from hundreds of millions to billions of dollars and maintaining a mandate to "see everything" and "win everything."
- Investment decisions are driven by selectivity and the treatment of seed investments as option bets, with the firm planning to size up positions only after quantitative revenue evidence confirms outlier potential, while treating seed valuations as secondary to securing the capital allocation to grow with clients.
- The firm anticipates a market environment where AI companies raise significantly larger sums than historical norms (moving away from the traditional 3-5 day seed size) and expects to deploy capital quickly in "18 months" to compete, while hedging against cycle risks through portfolio composition and position sizing.
- Market reflexive cycles are expected to continue until a major debt default occurs rather than equity write-downs, with a prediction that the "next few years" will reveal the extent of accounting creativity and gaming of metrics by founders.
- The firm intends to "pay up" to win deals and "double down" on companies with discernible traction, planning to "lock in gains" by taking 10% to 15% off the table at high valuations or selling chips at 30x to 50x returns, though it generally prefers to ride with founders until a sale.
- LPs are expected to prioritize DPI as the primary metric for raising capital, acknowledging that performance is a lagging indicator with a five to seven year delay, and the firm argues LPs should forgive rapid deployment if opportunities are real.
- Emerging managers with funds between $30 million and $100 million are identified as being in the "worst place to be" due to insufficient capital to compete in a poker table dominated by high chip stacks, whereas successful investors must have "max seven" participating in everything a venture company does.
- Venture-backed SaaS companies facing high multiples are described as "zombie" entities where no single party owns enough control to effect change, making rescue efforts harder than in private equity where majority owners can direct strategy.
- The firm expects capital allocation to be the critical skill for founders at scale, noting that money reveals true motivations rather than changing character, which may cause unmotivated individuals to "opt out" when wealth arrives.
- In the real estate sector, the firm identifies housing supply constraints and a lack of collective willpower to increase stock as the primary drivers of rising prices in California, rather than demand, while predicting that "rich will get richer" due to leverage in the capitalism system.
- The firm views "vintage diversification" and "time diversification" as essential, citing the failure of Menlo 8 due to a 10-month investment window, and warns against dogmatic rules in favor of adapting to the field of play.
- Specific market participants like Mark Zuckerberg are praised for capital allocation skills, while the firm notes that Snap's founder has not been rewarded as a shareholder over the last seven to eight years despite product success.
- The firm expects the "best outcome" for struggling SaaS companies to be a return of capital ("getting spooned") rather than a total loss to zero, driven by the necessity for LPs to enter the AI economy to hedge against their larger private equity portfolios.
- Public sector pension funds are expected to remain anchor tenants, while the firm anticipates increased M&A activity and a shift toward tranche financing becoming a standard technique for all market participants.
- The firm acknowledges the difficulty of predicting market turns, noting that "every week" brings unforeseen challenges, and advises LPs to focus on the "windshield" (deployment speed and management) rather than the "rearview mirror" (past performance).