Oct 21, 2022, 6:09 PM ETInterview, Fireside Chat, Podcast

Kyle Harrison: Why 75% of Active Investors Will Disappear in the Next Few Years | 20VC #940

Career Trajectory: Kyle Healy transitioned from a filmmaking background (including a YouTube "Pokémon Love Song") to running a pre-TikTok creator marketplace in Utah, which he eventually sold.
Venture Entry Point: He stumbled into venture capital after selling his first business, initially working at the Utah seed fund Kickstart before moving to the Bay Area.
Current Role: He currently serves as a General Partner at Contrary, aiming to build a new venture model by synthesizing lessons from previous firms.

TCV (Private Equity Style):
- Instilled a "doing the work" mindset rather than passive "memification" of venture.
- Emphasized an active approach where investors proactively offer specific help (e.g., "I did this, is it your priority?") rather than waiting for founders to ask.
Co2 (Hedge Fund Style):
- Taught the concept of "market arbitrage": understanding a market better than others allows for higher prices and more aggressive burn/Experimentation.
- Key Insight: Markets matter more than founders; a great founder in a bad market will likely fail, whereas a sufficient operator in a great market will win.
- If a great manager meets a bad business, the business's reputation suffers; if a great founder meets a bad market, the market's limitations remain.
Index (Graduate School):
- Shifted his perspective to treat venture capital as a studyable craft with explicit psychology and methodology.
- Rejected the "no one knows what they're doing" narrative, asserting that exceptional investors deliberately study their process to improve.
- This study-driven approach directly led to his writing on the "art and science of venture" and the formation of Contrary.

Survival of the Differentiated:
- Prediction (citing Josh Wolf): 50–75% of active private market investors will disappear in the next few years.
- Differentiation: Success relies on a firm's ability to articulate a distinct external identity; "so-so" firms lacking a clear character will be eliminated.
Shift to Partner Power:
- Power is migrating from monolithic firms to individual partners (e.g., Logan Bartlett, Healy).
- Founders are increasingly choosing partners over firms, valuing the "vibe" and personal brand over institutional history.
Definition of "So-So" Funds:
- Economic Performance: Funds failing to return capital or justify carried interest in a bull market are vulnerable.
- Culture: Internal toxicity (firms "eating each other") eventually spills out to impact performance.
- Brand: Reputation is the primary competitive moat; negative behavior (e.g., holding up funding rounds) damages brand quickly during corrections.
Three Inputs for Success:
- Discovery: Innovative, continuous methods to find top-tier companies (e.g., Y Combinator, Sequoia Scout programs).
- Selection: Superior decision-making processes for picking winners (e.g., Benchmark's circulation and conviction).
- Support: Scalable ways to help founders (performance is an output of these inputs).

The "Blackstone of Innovation" Concern:
- Concern that mega-funds (like Blackstone or Andreessen) are abstracting venture capital into macro portfolio construction, treating it as an asset class exposure rather than micro company building.
- Risk: When companies fail, it is a "blip" for massive AUM funds but catastrophic for the specific founders and families involved.
- Requires a balance between infrastructure (80%) and unique secret sauce (20%); over-focus on the 80% dilutes the 20% that drives innovation.
LP Incentive Structures:
- Current LP incentives are largely salaried/bonused rather than carry-aligned, creating pressure to return cash to previous LPs regardless of current fund performance.
- Future Shift: Expect a transition in wealth sources from traditional institutions to family offices who may allocate capital differently, potentially breaking the cycle of underperformance.
Fund Size Dynamics:
- It is becoming easier to raise $2B than $200M due to LPs (pensions, endowments) needing to deploy large check sizes ($100M+).
- Excess capital without guardrails leads to "hiding sins" (bad unit economics, bad product) via over-funding.

Post-Correction Trends:
- Suspension of Criticism: A notable lack of "mea culpa" from the previous boom; firms are avoiding reflection on past errors.
- Storytelling Shift: Founders are becoming more thoughtful about articulating specific unit economics and market size rather than relying on broad, optimistic narratives.
- Valuation Disconnect:
  - No rhyme or reason in pricing; down rounds are rarely accepted at Series A/B.
  - Many founders ignore the "venture math" (dilution, public market comps) that proves high valuations are unachievable without massive scale.
Personal Mistake (Price Sensitivity):
- Healy admits to investing too fast and losing price sensitivity during the boom.
- Realization: Building a billion-dollar revenue company in 4-5 years is an anomaly (a "tiny fraction" of startups); most successful companies are "compounders" rather than explosive nonlinear outliers.

Community as Product:
- Successful communities (e.g., Y Combinator) are "generational" and compound over time, unlike failed attempts that treat communities as "afterthoughts" or mere deal-flow funnels.
- Contrary focuses on community members (future founders) as intensely as portfolio companies, aiming for a seamless transition between community and investor relationships.
Brand Presentation:
- Venture firms are failing to adapt to the shift toward individual "renegade" brands; most marketing efforts feel uncomfortable or lag behind the celebrity appeal of individual investors.
- Effective Models:
  - Infrequent/High Quality: Bill Gurley, Ravi Gupta, Pat Grady (Sequoia).
  - Frequent/High Volume: Elizabeth Holmes (Hustle Fund).

Favorite Book: Reinventing Knowledge by Ian McNeely (focus on the "Republic of Letters" and modern DMs as knowledge drivers).
Most Underrated Angel: Amjad Massad (CEO of Replit) for bringing high ambition to the ecosystem.
Biggest Miss: Passing on Coinbase at $1.5B valuation; the failure was a "failure to imagine a colossal shift in user behavior."
Biggest Hit: TeamShares (buying small businesses, converting to ESOPs); validated the strategy of investing in ideas people think are "laughable."
Most Recent Investment: Pave (compensation data platform).
- Why: Built a "give-to-get" model where companies exchange HRIS data for benchmarking, creating a massive, actionable dataset on tech compensation.
Vision for Change: Wants to "de-risk the earliest days" of starting a company to lower the systemic risk tolerance currently trapping ambitious entrepreneurs.

Growth Market Outlook: The growth market will likely improve in 12 months only if a reality check occurs on valuations; currently, a "flight to safety" concentrates capital in the top 2% of companies while the bottom 98% cannot raise.
Rate of Firm Death: The rate at which venture firms fail will increase due to "internet time" (faster information dissemination), provided fund structures fundamentally change.
Wealth Sources: Expect a shift in capital sources toward family offices and new wealth pools that think differently about allocation, potentially altering the traditional LP-firm dynamic.