How do VCs differentiate themselves?

And looking at venture capital as a product - Interviewing Kyle Harrison of Contrary Capital

Venture capitalists are on a mission to show startup founders they are much more than a check - they’re a differentiated product. I had the chance to sit down with Kyle Harrison of Contrary Capital to discuss the rise of “Venture capital as a product” and break down all the ways investors are becoming more useful to their portfolio companies.

For those taking note at home, Kyle started his career as a founder, then joined the investment team at TCV. That eventually led him to Coatue, and later Index Ventures, top tier institutions fueling the SaaS boom of the 2010’s. He’s now a General Partner at Contrary Capital, a venture firm obsessed with backing bold founders.

Here’s a snapshot of some of the category defining companies Kyle’s invested in. I call it the “Kyle Market Map.”

To kick things off, do you think the competition for deal flow has gone up in the last five years with investors from the late stages coming in earlier, and vice versa?

Competition in venture is partially a function of supply and demand. Last year in particular, there was huge demand for tech companies of all shapes and sizes. Now, as the economy is struggling, that demand has sort of evaporated. 

There is still competition but only for the top 10-20% of companies. My partner, Eric, wrote a great post about how venture is evolving. But the reality is there will always be intense competition for what are seen as the very best companies. 

Moving earlier and investing at the seed stage, or whatever, is seen by some firms as option value - just in case those companies break out. As a founder I would be really careful about those kinds of investors. They’re not necessarily in it for the long haul, especially if things don’t go perfectly for you.

Late stage firm crashing the Seed round

With all the competition, do you think an investor’s brand name is enough to pull deals anymore? Or do they have to offer more services? 

Investment firms used to be monolithic brands. Ten years ago, as a founder you might not have really heard of the person, only the brand.

And now we’re seeing both firms and people specialize in certain areas.

First investment firms evolved into Fiefdoms. And then each Fiefdom inevitably developed a high profile leader.…a16z Crypto has Chris Dixon…Sequoia China has Neil Shen. 

And so post 2020, I now think that being a renegade in venture is becoming more and more about the individual investor’s brand vs the mothership’s brand. It used to be Chris Dixon at a16z, and now it’s as much about Chris Dixon. Same thing when you hear Mike Volpi’s name (from Index) or Alfred Lin (from Sequoia). You’re mostly excited to work with that person. 

Firm brand is still powerful. But the partner brand is perhaps becoming more powerful. If a particular partner is really good, they could very well compete with another firm when it comes to getting into a deal. You might see the perfect person at a lesser known firm successfully competing with an unknown person at Sequoia and win the deal. That’s new.

What are some of the common ways investors successfully differentiate themselves from others? Are there some common buckets?

Other than Capital, VCs can help you find new employees (Talent), new customers (BizDev), useful data for decision making (Ops Support), and show you how to approach a new market (International). Some people tried to build their value prop around offering capital with no sensitivity around valuation, and just leaving founders alone. But that lack of sensitivity hasn’t really worked out well for them.

How do you think about “productizing” and “differentiating” the services you provide at Contrary?

I think of the things we do internally as “SKUs”. Being a product led venture fund doesn’t mean you need to have software to sell. The highest quality SKU we provide is Talent. We have a community of 500 people, mostly top tier engineering and design professionals who have gone to work at stellar companies like Ramp, Anduril, and Retool. Companies looking to scale want access to this high quality talent pool. So we’ll help you hire from our community - that’s one SKU.

We also have a Content SKU. Our newsletter, Startup Search has tens of thousands of subscribers, which allows founders to highlight the culture of their companies in attracting candidates. We launched Contrary Research to help companies better tell their stories. And we have deep relationships with many of the best business writers and podcasters creating content.

Contrary was built around a key insight that you can build a lifelong platform to invest in a person, even before they start a company - can you unpack that for us a little bit?

We try to identify sharp people as early as possible, and then do things to support them throughout their careers. 

Bigger firms tend to have this “hurry up and wait” attitude when it comes to networking with future founders. They’re eager to meet founders, but they usually can’t do much for a founder until they start a company. There’s only so many free dinners you can invite them to.

What we do is identify smart people as fast as possible and support them relentlessly with career opportunities, data, and intros. That way we will have an unfair advantage when they do decide to start a company.

For example, we have 100 different student venture partners at 40 schools. We get to know these young, future entrepreneurs really well. We’ll help them get jobs when they graduate, place them in startups so they can learn, and we’ll even invest in the startups they go to work for.

We’ve gotten to know multiple cohorts of smart, young people over the last five or six years and they’re now coming back around looking to raise a seed round. It’s a long game we’re playing, and now we’re seeing it work in real time.

Your meme game is strong - I’ve seen a lot of good ones on twitter poking fun at “VCs being helpful.” Is there one that comes to mind for you? 

Turner Novak 🍌🧢 @TurnerNovak

VCs adding value to portfolio companies

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You write Investing 101, one of my favorite newsletters to read on Substack. I think you are a great storyteller. What’s the story or piece you’ve been most excited to share in the time you’ve been doing this?

This article was the original reason I started writing. I saw these trends unfolding in venture, and I wanted to articulate what it meant. It also sort of formulated my brand, where my writing is largely about unpacking the thinking behind venture (sort of a peak behind the curtain.)

The Unbundling of Venture Capital

I’m a metrics guy - what’s the first metric you look at when you get into a company’s data room, other than revenue growth rate?

Net dollar retention. NDR is a measure of how much your existing customers expand in a given period, net of any churn or shrink. Generally, anything over 110% is good and anything over 130% is great. Net Retention of 125% means you could stop selling to new customers and would still grow at 25% next year. That’s powerful, and a strong indicator of the business model’s future success.

What’s a metric that you think is overrated or used incorrectly?

LTV is overrated just because there is so much guesswork. First off, you generally need at least three years of selling history for a dataset to be significant. Not all startups we invest in have that. Plus, much like CAC, there’s a nearly 100% chance that whatever LTV a company self-reports understates churn as well as cost.

To get a little philosophical on you - if you could put one business related message on a billboard in Silicon Valley or downtown New York what would it be?

"If your employees hate you, it's only a matter of time until your customers hate you."

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