Venture capital investors are getting smarter, not richer, to compete in Silicon Valley

Ron Bouganim is founder and managing partner of
Govtech, a venture firm that’s laser-focused on technology that
modernizes the internal operations of
government.
Govtech

• Silicon Valley is flush with cash, with nearly $58
  billion invested in US venture-backed startups so far in
  2018.
• With
  so much money in venture capital, small-time investors are
  struggling to compete for hot deals.
• Some investors are standing out by specializing. They
  may target a specific tech sector, which differentiates them by
  domain expertise and the quality of their
  relationships.
• Business Insider spoke with three venture capital
  investors in Silicon Valley to find out why they went
  niche.

There was a time in San Francisco when pretty much any wealthy
individual could write a check and own a piece of a company or a
portfolio of companies through partnering with a venture firm.

But being rich doesn’t get you as far in today’s tech landscape.

More and more venture firms, from Palo Alto to Tokyo, are pouring
billions of dollars into mammoth, global growth funds known as

“mega-funds” that have invested in startups building the
future of
work,
cars,
computing, and even
dog-walking. Sequoia Capital told limited partners they would
have to make a
minimum investment of $250 million to procure a spot in its
growth fund.

The rush of capital has produced a number of effects, including
inflated startup valuations and increases in the amount of
capital competing for access to the buzziest startups in Silicon
Valley.

“In the early days of venture, one could have made the argument
that because venture capitalists had money and entrepreneurs
didn’t, and there were limited choices [with fewer funds], having
money itself was competitive advantage,” Ron Bouganim, founder
and managing partner of boutique venture firm Govtech, told
Business Insider.

“With the oversupply of capital, having money alone is not an
advantage. There’s so much money chasing every investment
opportunity,” Bouganim said. “How do you differentiate
yourself from another investor? Some form of specialization is
necessary.”

SC Moatti, a former Facebook executive who raised $13 million for
her firm Mighty Capital’s
debut fund, put it this way: “Money is money. It’s nothing
specific. It’s really hard to say, ‘You should take my money
because it’s more green that somebody else’s.'”

The situation has created a shift in venture capital, where
small-time investors are rewriting the playbook on how to land
deals. Those who don’t have the reputation or financial backing
of the most established venture firms on Sand Hill Road are
getting smarter, not richer, to compete with the fat funds
sprouting up.

Some investors look to specialize by targeting a specific tech
sector, which gives them a robust network of connections, domain
expertise, and higher quality deal flow, because founders start
to seek out those firms that aim to deliver more value for their
buck.

Knowledge is more valuable than money

The first half of 2018 saw nearly $58 billion invested into
venture-backed startups in the US, which is more than VCs
deployed for the full year over six of the past 10 years,
according to the National Venture
Capital Association. An estimated 300 new funds will close in
2018, which only adds to the opportunities for founders to raise.

In order to compete for spots in hot investment deals, investors
are asking themselves why a founder should take their money over
someone else’s pile of cash. For some, it’s about who they know.

For others, it’s about their expertise.

Clara Brenner and Julie Lein just raised $22 million for
their debut fund to invest in startups solving important
challenges for cities. Those companies are a tough sell for
venture capitalists, because their products often require a lot
of money to launch and they face regulatory hurdles from local
authorities who prefer the status quo.

“We gravitate towards businesses operating in
highly-regulated or politicized spaces. And we offer our
companies a lot of hands-on support around these issues, which
they’d be hard-pressed to find elsewhere,” Brenner told Business
Insider.

Julie Lein (left) and
Clara Brenner are cofounders of Urban Innovation Fund, a venture
firm that puts money into startups solving important challenges
for cities.
Urban Innovation
Fund

The investors met as graduate students at MIT Sloan School of
Management, where they studied the intersection of cities and
entrepreneurship. They applied their knowledge of urban
innovation as cofounders of an accelerator called Tumml, which

made early investments in companies such as Chariot, a
private shuttle service that carries commuters where they need to
go, and Neighborly, an online investment platform for
civic projects.

Brenner and Lein helped shape some key policies inside Chariot,
including the decision to hire locally and deploy shuttle buses
in neighborhoods that are underserved by public transportation,
in order to build goodwill in the community. In 2016,
Ford bought Chariot for $65 million, creating a nice payout
for Brenner and Lein, as well as investors, or LPs, in their
urban innovation accelerator.

The investors are betting that their new firm, Urban Innovation Fund,
will attract social-impact companies because of their domain
expertise. They already have a track record for success: Chariot
is thriving, while its Andreessen Horowitz-backed rival
shut down.

The decision to specialize was a no-brainer, according to
Brenner.

“Specializing helps you stand out. For an entrepreneur, you
are demonstrating passion and expertise for their business, which
can make you a real value-add,” Brenner said. “For an LP, you are
offering them a portfolio that doesn’t look like anyone else’s,
which can help them diversify. And, of course,
building
 a well-considered thesis can make you
a stronger, more discerning investor.”

A laser-focused venture firm rises

Many years ago, Ron Bouganim made a similar observation.

As the Canadian entrepreneur crawled through the process of
becoming a US citizen, he saw that the government was ripe for
innovation. In 2014, he launched a venture capital firm called
Govtech to deploy capital
into startups that aim to help governments be more responsive,
efficient, and better able to serve society.

The firm only makes about four investments a year and is
laser-focused on technology that modernizes the internal
operations of government. This is not to be confused with civic
technology, which supports the public’s interaction with
government, and is likely a better fit for Brenner and Lein’s
Urban Innovation Fund.

Govtech companies build software tools for government employees
that improve how they deliver everything from foster care to law
enforcement to food safety. The portfolio ranges from Glimpse, which identifies and
evaluates a school district’s “eROI” (education return on
investment) for every product, program, or strategy implemented
in a classroom, to Sema, which
transforms legacy software code maintenance for government
software systems.

Govtech is based in
downtown San Francisco.
Melia
Robinson/Business Insider

Matt Van Itallie, CEO of Sema, said he considered many venture
capitalists when fundraising for his company.

“Our goal was to partner with a fund that truly understood the
govtech market,” Van Itallie
said in a press release announcing Govtech’s second fund.
“We’re not just backed by the Govtech Fund’s capital, but with
the govtech ecosystem they have built.”

Companies that have taken venture dollars from Govtech have
relationships with over 20,000 government agencies, and according
to Bouganim, the ecosystem adds 10 new agencies every day.

It’s not uncommon for those startups to pitch their government
partners on services provided by other companies in the Govtech
portfolio. They share learnings with each other in the firm’s
Slack channel and on company offsites. Some entrepreneurs
even come to work at Govtech HQ, a 4,000-square-foot office space
in San Francisco that was designed for hosting speakers,
lunch-and-learn programs, and salons with visiting government
workers.

Bouganim said while he doesn’t have the resources of a large,
private equity fund with “a hundred staff members that are doing
research” as if it had an “in-house consulting shop,” he adds
value in other ways with a close-knit portfolio of 19 companies.

“I don’t think venture capital is different from any other
business,” Bouganim said, adding that when he advises his
startups, he tells them, “‘You need to have a large market
opportunity, you need to have a differentiated product, and as
you scale that product, you need to have competitive moat. If you
don’t build competitive moat, someone else will come along and
probably displace you.'”

He went on, “So, when you just look at the basic principles of
running a startup, why would that apply any differently in the
world of venture capital?”

Investors are more involved than ever 

SC Moatti says she has no interest in giving startups
piles of cash. Anyone can do that, she says, and Moatti believes
she has something more valuable than money to
offer.
Michael
Ajamian

Most venture firms specialize to some extent in order to attract
a certain type of company. Investors might choose to focus on a
venture stage from pre-seed to growth, a geography, or a sector.

With so much money in venture, some investors say they have to do
more than specialize in order to attract tier one startups.

“That’s not how you stand out,” said SC Moatti, the former
Facebook executive who launched her own venture firm. “You stand
out by the value you bring, not by saying, ‘I do this and not
that.’ You stand out by saying, ‘You should take my money because
it really has a different color, because we give you access to
Products That Count.'”

Mighty Capital invests almost exclusively in product-driven
startups and differentiates itself from other growth-stage
funds by giving its portfolio companies access to Products That Count, one of
the world’s largest networks of product managers. It’s helpful if
a founder wants to hire product managers, sell to product
managers, or get advice from insiders on building their companies
at scale.

Moatti has figured out that social influence is what she brings
to the table, beyond writing checks for between $500,000 and $1
million.

Mighty Capital makes mostly growth-stage investments, because
Moatti said that’s when the firm adds the most value for
companies. The job of a product manager is to match a customer’s
problem with a solution in the form of a product. This is known
as product-market fit, and it’s an essential goal of growth-stage
companies.

Some venture firms are building out programming and services to
support the portfolio companies after they’ve invested. 

Structure Capital, a young
venture firm in San Francisco, invests almost exclusively in
sharing economy companies whose goal is to reduce waste. (The
firm’s founder, Mike Walsh,
seeded the fund with $300,000 worth of Uber stock before the
company blew up.)

According to Walsh, the firm’s “special sauce” is a two-day
bootcamp for portfolio companies that Structure Capital
offers. 
Entrepreneurs meet with advertising
executives and brand strategists to craft their brand, through
developing logos, idea videos, taglines, mission statements, and
their overall brand strategy. This is especially important for
sharing economy companies (think Airbnb and Uber) that rely on
customers loving the brand to grow their businesses.

In Silicon Valley, it’s the investors who are trying to impress.

“Almost always, we are the most hands-on investor our
portfolio companies have,” said Brenner of her new firm, Urban
Innovation Fund. “As a team, we pride ourselves on being useful —
with deck prep, fundraising support, or policy-related strategic
planning. We take their calls and texts late at night, and we are
always repping them to other investors.”

According to Moatti, founders should expect nothing less when
there’s so much capital competing for investments.

“Most venture capital firms offer money and a network,” Moatti
said. “Well, if you’ve been in the Bay Area for long enough, we
all have a little bit of money and a network.”

“The fact that we give access to basically hundreds of
thousands of potential hires, or hundreds of thousands of
potential customers, that’s really differentiated,” she
said.

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