Sep 12, 2022, 3:53 PM ETInterview, Fireside Chat

Will Quist: Why 95% of Venture Capital is Not Really “Venture Capital” | 20VC #924

Will is a sixth-generation Bay Area native who grew up in Woodside, riding down Sand Hill Road while playing water polo, yet had minimal early exposure to the venture ecosystem.
He initially intended to avoid the finance sector, swearing he would become an operator after an internship at a Berkeley incubator where he managed operations for startups with limited resources.
Following a year as a professional water polo player in rural Hungary, Will worked at Red Herring magazine, where he interviewed hundreds of companies to curate a top 100 list featuring Pandora and Mellanox.
His entry into formal venture investing occurred via a bulge-bracket investment banking role that transitioned to "Industry Ventures," a firm founded by partners who bet on the thesis that companies would stay private longer, creating demand for secondary markets.
Will spent a decade at Industry Ventures, which grew to a couple of billion dollars in AUM, providing him with a crash course in underwriting, LP relations, and sector-agnostic deal-making before he launched his own firm, SLO.

Will asserts that 95% of the current venture capital industry is not "venture" in the classic sense; true venture involves funding a founder to run a testable hypothesis that could dramatically alter enterprise value.
The majority of current capital is deployed in "new venture" or growth stages where investors seek modeled data, extrapolatable trends, and actuals rather than novelty or theories.
There is a structural lack of "rebels" in the industry because as asset classes scale, they shift from non-zero-sum collaboration to zero-sum competition, favoring operators who fit a specific organizational playbook over those who challenge consensus.
Will argues that multi-stage funds often ignore conflict risks at the seed stage, treating seed investments as option bets with negligible downside relative to their total fund size, whereas classic venture firms often concede the consensus game at early stages.
The industry is facing a "denigration of returns" as large firms increasingly favor consensus bets to avoid the penalty of being "wrong" in a competitive, zero-sum environment, leading to homogenized investment theses.
Capital allocation in venture is increasingly driven by LP incentives; partners are rewarded for avoiding firing risks (choosing large, known brands) rather than maximizing upside, as the cost of being wrong is higher than the upside gain from niche bets.

Will adopts Charlie Munger's universal principles to evaluate enterprise value, utilizing five specific levers: the arc of history, absolute value proposition, relative competitive advantage, market size (based on historical spend), and defensibility.
The firm evaluates data sources in four states to determine pricing: statistically relevant longitudinal first-party data, highly relevant third-party data, anecdotal first-party data, and pure hypotheses.
Unlike public market investors who require significant data, venture firms must finance companies to run experiments that convert theories into first-party data to earn their return.
Will identifies "market" as a primary variable, noting that a world-class founder cannot succeed in an impossible market, and that capital efficiency is often a more critical determinant of success than founder charisma.
To manage risk in a "one click away from consensus" strategy, the firm accepts higher loss rates but offsets them by seeking massive economic wins on correct bets or building index-like portfolios for novel assets.
The firm views reserves as increasingly critical in a tighter capital environment, requiring disciplined underwriting to ensure that capital deployment has a lower opportunity cost than alternative diversified ventures.

SLO operates with a "Special Forces" mentality for early-stage bets, requiring high subjectivity and rapid execution, while reserving "Infantry" models for scaling companies that require process, repetition, and standardization.
The firm admires Sequoia Capital for treating venture as a rigorous business with a clear DNA of asking the five enterprise value questions, rather than relying on subjective intuition.
Will advises founders to avoid branding spend until they have verified value propositions through performance marketing, noting that early branding is often a waste of capital before product-market fit is proven.
The firm rejects a "hold mode" mental state, advocating for a binary mindset where an investor is either aggressively buying or preparing to sell, based on signals that the business is compounding or that price has outpaced reality.
Will identifies FairSquare, a Medicare brokerage founded by Daniel, as a recent high-conviction investment due to its founder's execution in bringing transparency to a high-friction market and bridging digital care with offline needs.

SLO intends to remain a "Venture Classic" firm rather than becoming multi-stage, citing that the human capital requirements for competitive multi-stage management do not align with their DNA.
The firm aims to function as a "generalist collaborator" in the consensus game, adding value to companies and other GPs much like the investment bank Allen & Co, by combining deep classical venture skills with broad industry networks.
Will predicts that the industry will consolidate into firms that pick specific quadrants of strategy and organization, while mid-tier firms that fail to adapt will struggle to find alpha.
He anticipates that new venture models (like Tiger Global) will retrench to smaller, more private scales, maintaining their thesis that companies quickly become growth-stage and modelable, but with tighter filters on capital deployment.
The firm believes there is a significant mismatch between the number of startups seeking venture capital and those that actually fit the definition, and advocates for better education on which business models truly require venture funding.