Venture Legal, Ed. 8: How AI FOMO is Fueling VC Competition
Venture Legal Series #8
Abstract:
“The reality is that we love competition at Apple. We think it makes us all better.”
That was Tim Cook’s take on competition, as he told NBC News’s Brian Williams back in 2012.
Today, amid the ongoing AI investment race, what impact is competition having on VC firms?
In the latest edition of Venture Legal, I take a look at how AI is intensifying VC competition – and examine some of the tactics that firms are using to differentiate themselves.
As PitchBook wrote earlier this month in reporting on GenAI investments, “The competition among VCs is intensifying as fear over missing out continues to drive record dealmaking.”
This week’s Venture Legal feature story explores this topic, and considers some of the areas in which VCs can seek to level up and stand out, including:
⭐ Taking a vertically-specialized approach;
⭐ Enhancing startup support; and
⭐ Leveraging communications strategies.
Full Article:
This month, PitchBook reported, “Generative AI has commanded the attention of the entire venture ecosystem, and who’s writing the checks and keeping the boom going has been in constant flux…..”
The result, according to the Pitchbook report? “The competition among VCs is intensifying as fear over missing out continues to drive record dealmaking.”
Similarly, in reporting last week on Europe’s “AI gold rush,” which it called a “once-in-a-generation moment,” PitchBook wrote that,”... increased competition is making life more difficult for investors,” quoting Octopus Ventures partner Kirsten Connell as saying, “No one wants to miss out on the next big AI company.”
In a previous newsletter, I focused on how the AI startup boom is accelerating the ongoing evolution of the traditional VC model, including becoming RIAs, doubling down on secondaries, adopting PE strategies and embracing cryptocurrency. Here, I wanted to take a look at how the AI boom is also driving competition among VC firms, and some of the ways firms seek to differentiate themselves from their competitors.
AI is intensifying VC competition
As Tom Sheridan, US VP at RTP Global, wrote in a March post, “For years, the competition to invest in top-tier startups has been intensifying, driving up valuations and pushing VCs to rethink their strategies.”
Sheridan cites Clickhouse as an example, noting it “raised $50 million in a Series A only to follow up with $250 million in a Series B just two months later at a staggering $2 billion valuation. Deals like this underscore the rush to secure high-quality startups with the potential for massive returns,” adding, “...the battle for the best deals became even fiercer.”
I’d also point towards another example in Chime, the FinTech startup which successfully IPO’d this month at $14.5B, following a remarkable funding story that saw the company nearly fail in 2016 before reaching a Series B, only to then have an oversubscribed Series D in 2019 that, TechCrunch reports, included Iconiq, which spent two years “courting” Chime.
And, last week, enterprise AI startup Glean announced it raised $150 million in Series F funding, reaching a $7.2 billion valuation, just nine months after Glean announced a $260 million Series E that doubled the company’s valuation to $4.6 billion. Wellington Management led the raise, about which Crunchbase reported, "A slew of new investors participated in the startup’s latest financing..."
In this competitive environment, Sheridan writes, “With fewer deals and greater competition, VCs are being forced to adapt. The best are shifting strategies to stay in the game.”
Below are a few strategic ways that some VC firms are cultivating a competitive advantage.
Taking a vertically-specialized approach
Amid rising competition, more firms have adopted a specialized approach. An analysis by Pitchbook found that specialist vehicles accounted for a larger share of overall VC fund count in recent years, rising to 26.4% in 2023 compared to 22.2% in 2014.
Judah Taub, Managing Partner at Hetz Ventures, wrote in Forbes, “At one time, doctors were expected to have expertise in all aspects of the human body and treat every ailment. Nowadays, there is a specialist for every section of our anatomy. ….The lesson is clear: To succeed in an increasingly competitive environment, we must play to our strengths and work to make those strengths even more apparent, meaningful and impactful. Venture capitalists (VCs) are no different.”
Take for example, DefenseTech, CyberSecurity and FinTech, three sectors with an array of vertically specialized VC firms such as:
SYN Ventures, focusing on cybersecurity, national defense, and compliance; Ballistic Ventures, a “VC firm dedicated to funding and incubating innovations in cybersecurity and nothing else;” Shield Capital focused on cybersecurity, AI and space, and Silent Ventures focused on aerospace, defense, and national security companies.
Earlier this year, TechCrunch reported that “there is no shortage of venture capitalists still betting big on the (FinTech) space.” QED Investors, Infinity Ventures and TVV Capital are some of the firms leveraging operator and domain expertise to their competitive advantage in the FinTech sector. (A note here on LegalTech: as I’ve explored in previous editions, the LegalTech space is both related to and encompasses these sectors and more, with some funds either focusing on LegalTech specifically as well or including it among other legal adjacent, vertically-specialized areas.)
While being highly specialized can be advantageous, Taub also cautioned in Forbes, “On the flip side, there are venture firms that are starting to feel the challenges of being too narrowly focused, especially when the fund size is big in comparison (i.e., a pre-IPO fund for cybersecurity companies). Aside from putting all eggs in a very narrow basket, they may inevitably begin to see conflicts and competition between portfolio companies in hyper-focused markets.”
Perhaps pointing towards potential challenges, earlier this year, early-stage VC firm Countdown Capital, which had focused on hard tech industrial startups, said it was shutting down, citing competition from large multi-stage firms and writing in an annual letter “Consequently, we think early access to the best companies for a specialized, early-stage venture firm like Countdown will become more limited.” TechCrunch, however, predicted the closure was “not a bad omen for micro-funds,” calling the shut down, “more of an isolated event.”
To mitigate the risk of being too highly specialized, while also leaning into domain-specific expertise for a competitive advantage, it can make sense to combine related or adjacent verticals that align within a cohesive investment thesis, to retain both a tight focus while avoiding being too narrowly drawn.
Enhancing startup support
VC firms may also set themselves apart by offering enhanced, hands-on support for startups that go beyond the standard.
Jon Callaghan of True Ventures, which invests in companies in AI, bio, climate and more, told Harvard Business Review that his firm “believes that advisory services play such a crucial role in attracting the best entrepreneurs that it has spent 15 years and $10 million developing them.” True Ventures’ website articulates dedication to hands-on founder advisory and support, with statements such as: “We want founders to feel supported as humans first, and as business leaders second,” and a platform commitment to “invest heavily in resources and educational events to help True Founders and their teams reach their full potential.”
SemperVirens, a firm focused on HealthTech, FinTech and WorkplaceTech, recently announced $177 million in new funds, stating in the announcement, “... SemperVirens has built a reputation for more than just providing capital -- it actively helps portfolio companies secure strategic partnerships, accelerate enterprise adoption, and drive to achieve scale in ways that set it apart from traditional VC firms. This high-touch approach has helped many of its portfolio companies accelerate their go-to-market pathway…”
Another case in point: Ridge Ventures states its commitment to “Nailing product market fit and scaling revenue systems … (helping) build hundreds of companies from seed to billions in outcomes, forging deep buyer relationships along the way. These form the basis of our 100+ company-strong Ridge Revenue Network, with CXO’s from all corners of the Fortune 500. We thoughtfully connect founders to customers…..” Certainly, connecting portfolio companies to customers delivers a tangible value-add and yields a competitive advantage.
Focusing on communications
The relationship between VC firms and the idea of self-promotion has had an evolution, from a history of avoiding attention to an embracing of a more open public persona.
Today, a focus on communications is essential to stand out, and firms can use communications tactics as a strategic differentiator designed to both boost their own profiles, as well as those of their founders.
VC firms “increasingly see communications as a way to help their investments stand out from the competition,” reported Axios in a story, headline: "Communications as a VC Weapon.”
“The art of storytelling is incredibly important. And many—maybe even most of the entrepreneurs who come to talk to us can’t tell the story. Learning to tell a story is incredibly important because that’s how the money works. The money flows as a function of the stories,” said Sequoia founder Don Valentine, explaining how his firm adds value by helping its founders to learn external communications skills. The Sequoia site is indeed rich with stories – including podcasts, perspectives and news, as well as founder spotlights.
It can also be helpful for VCs to spotlight themselves as thought leaders. As Sheridan writes in his post, for VC firms, “Having a personal brand, podcast, or strong social presence has become a competitive advantage, citing 20VC in Europe, which operates at the “intersection of venture capital and media.” He also mentions Nichole Wishoff and Turner Novak, who leverage social media like LinkedIn, TikTok and X.
I’d also add that communicating a strong commitment to philanthropic activity can demonstrate the commitments and values of VC firms, and align them with like-minded founders. ICONIQ Capital, for example, has ICONIQ Impact, a platform for “collaborative philanthropy,” designed to “convene an extraordinary community of families, founders, and organizations to tackle some of the world’s most complex challenges,” with initiatives around causes such as youth mental wellbeing, climate equity, oceans, and education and economic mobility.
And, as I noted in the previous edition of Venture Legal, marketing and communications is one of the areas where AI can assist VCs in eliminating “pain points” around creating podcasts, websites, blogs and graphics – all of which can be used to amplify personal profiles, portfolio companies and philanthropic endeavors.
➡️ The bottom line + takeaways
Call it a case of “best of times, worst of times,” perhaps, as the AI boom is also being associated with challenges. As Fortune reported this month, “The number of U.S. zombie venture firms has increased,” with a headline reading, “AI-built startups could fuel increase in venture capital ‘zombie’ funds.” Likewise, this week, PitchBook reported, the “Zombie fund era is pushing more VCs to take a career pivot,” quoting Equal Ventures managing partner Rick Zullo as saying, “We’ve already seen a fair amount of defections out of venture, and I hear more are coming.”
Amid this environment, which is ripe with both challenges and opportunities for VCs, it makes sense that we are seeing heightened competition.
In summary, some of the ways VC firms can adapt to meet the challenges associated with increased competition include:
✅ Leveling up in areas such as specialization (which can also involve enlisting domain experts to bring in industry-specific operator insight and relevant deal-flow);
✅ Increasing support for founders and startup teams; and
✅ Leveraging strategic communications to highlight their brand and their founders.
➡️ These are just some of the areas that VCs can look to when considering how to continue to meet the ongoing competition around the AI race. We’ll monitor how these strategies work in both the short and long terms as we track the ongoing evolution of the VC realm.
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