How companies can falter with big brands and prosper with boutique VCs

For the last 14 years, I’ve regularly heard people exclaim, “The world (especially the VC ecosystem) is awash with liquidity.” Both founders and VCs themselves are gorging themselves on an abundance of cash. The prevailing wisdom seems to be that if a little money is good, a lot of money must be better. Some founders are drawn to big funds because they assume “brand advantage” will help them get customers (mainly false) and recruit (maybe). But equating success with the size of a round is akin to feeling validated when one takes out a huge mortgage. It ain’t free.

Many of the former early-stage venture capital firms have raised funds in excess of $1B. The massive size of these funds lead to two major consequences. First, it drives them to focus on later stage investments where they can write bigger checks. Personally, I am thrilled when the bulge bracket firms* shift away from the most important part of the venture capital business — becoming the foundational partner to founders at the earliest stages of a business. Second, it forces a business model I call “strap on the booster rockets,” wherein every company is expected to shoot the moon. It often destroys value.

Let me tell you a true story: A Costanoa seed investment had very fast early growth that earned it a big check from a highly regarded top five brand-name venture firm. The business continued to grow very quickly fueled by aggressive spending on sales and marketing. The day the founder raised $40M in financing, I called to say, “Slow down, you’re running hot. At that burn rate, there is little room for error.” When their next-generation product was delayed, growth slowed, but expenses were locked in. The burn rate exploded, and the founder was replaced. The sloppiness that comes with excess capital is real, and it has enormous economic and career consequences for founders.

I am more convinced than ever that boutique VC firms do the best job of partnering with and serving the interests of founders and stakeholders in building companies of consequence. Focused Series A boutiques have uniquely compelling value propositions for companies, including:

• Specialized expertise. Boutiques are necessarily specialized. Startups can’t be all things to all people and neither can venture firms. A boutique firm like Forerunner has unique knowledge about how to build direct-to-consumer brands that resonate and scale e-commerce operations. Covering the basics in every board meeting to keep all members on the same page slows companies down and limits input to platitudes and VC cliches.
• Every company counts.Unlike bulge bracket firms that only care about rocketships, a boutique has relatively few investments, which means they’re financially and emotionally deeply committed. Boutique firms both care more and can dedicate time because they have smaller portfolios. Your company will be stronger if your board members know your business, can connect you with prospects and partners, and can help close candidates for key roles. Trae Vassallo from Defy Ventures is a great model as she pours her heart and soul into every portfolio company.
• Right-sized capital, right time. A world-class boutique firm has enough capital to lead a substantial round, to anchor the board and play the role of a lead investor. Costanoa led the Series A at Alation after incubating it in our offices for nine months. It enabled the company to build great product, attract reference customers like Ebay and gain early market momentum before Icon Ventures (a Series B boutique) came in to lead that round and set the company up for category creation and explosive growth.
• Constructive capabilities. Firms that are specialized can offer more focused expertise and capabilities because their portfolios experience more similar challenges. At Costanoa, we’ve invested in a world-class operating team with full-time leaders in Sales, Marketing and Talent to help our more technical founders achieve product market fit, learn how to bring sales and marketing into a more technical organization and get from $0M to $10M in ARR quickly and efficiently. We just did our CEO and community survey again this year and were thrilled our Net Promoter Score was +75. That doesn’t happen by accident, but rather because we listen to founders and work hard to make sure our efforts add value and are not a distraction.

I get it; it sounds nice to have a big chunk of money on the balance sheet for a rainy day and a firm with infinite resources behind you — until you calculate the dilution (and preference stack) that comes with it and recognize the cost of an investor for whom “shoot the moon” is their only playbook. The investor’s desire to strap rocket boosters onto your startup because it serves their business model might not correlate with the founders’ desire, or really, board members’ fiduciary responsibility to optimize the opportunity for any individual company.

The good news is that founders get to choose. In my opinion, there are two guidelines: 1) pick an investor who will always put your company first and do the right thing regardless of their personal interest or firm strategy, and 2) work to identify an investor whose “optimization function” is similar to yours. Do what the college counselors are telling today’s teenagers: focus on fit, not brand.

But the major point here is while the bulge bracket firms might steal the press headlines for their $8B and $100B funds — there are a set of venture capital boutiques just like Costanoa that are engaged in partnering with founders in a different, more sustainable way. Even our theoretical competitors as Series A enterprise boutiques like Wing, Aspect, Defy, Rally and Unusual Ventures are regular co-investors — and excellent partners. Our cohort really helps build businesses that endure. I encourage founders to look broadly for the best partner and capital for your business. You deserve to have your company at the center of the universe — and can — with a boutique firm as your foundational investor.

Note: Bulge bracket is used to describe the large, global, multinational investment banks. They include household names like Morgan Stanley and Goldman Sachs — and offer a wide range of services to global companies across all industries. It is shorthand for massive scale, perception of eliteness, a broad range or services and coverage across all sectors — that is, no specialization. In venture capital, the implication is multi-sector, multi-stage, and big brand.