Kyle Harrison
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podcast January 13, 2023

Your Fund Size Is Your Strategy

Sand Hill Road · hosted by Erasmus Elsner

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Summary

A 47-minute conversation with Erasmus Elsner on Sand Hill Road, his “little pirate radio station” for studying venture capital, released January 13, 2023 and recorded in late 2022, a few months after Kyle joined Contrary as a general partner. Erasmus had read the run of essays Kyle wrote during the reflection period between Index Ventures and Contrary, and the episode works through them in order: why the venture model is under-innovated, what “your fund size is your strategy” actually implies, why the general partnership is the wrong org chart, what a VC product is, how brands unbundled into individuals, and why Contrary.

How Kyle got into venture, and why he writes. Before venture Kyle ran a creator marketplace out of school, a videographer who had too many wedding and commercial clients and started farming the work out to other photographers, designers and videographers for a cut. He ran it for four years, sold it, and only then heard the words “venture capital.” Someone told him that being a resource for passionate creatives on their journey was roughly what a VC does. A year at a seed fund in Utah, then TCV, Coatue and Index gave him what he calls the three flavors of venture: the private-equity-esque style at TCV, the hedge-fund style at Coatue, and venture classic at Index. Writing came out of two things: a head full of questions about how different kinds of investors make different decisions, and a growing wish for a startup vibe, which turned out to mean joining a young venture firm rather than starting another company.

The time of reflection. Kyle’s joke is that for an industry steeped in innovation, venture is one of the most under-innovated models out there, and the sameness had once looked to him like stability. Before putting his fingerprints on a firm he wanted to know whether he believed in its direction, which meant answering questions he did not have answers to: why do firms do things the way they do, does it lead to good decisions and good cultures, and what is any firm’s right to survive? He borrows his dad’s accounting term for the default, the SALY principle, “same as last year,” and says the point of the exercise was to stop doing things because that is how they were done last year.

Your fund size is your strategy. Benchmark keeps its funds small because its model does not scale to a $2.5B fund; a firm raising $3B or $4B has to deploy large amounts into companies that can return them. Both are legitimate strategies. The problem is that every strategy still runs through the same structure, a handful of partners at the center of the universe, and that model breaks down once a firm is making a hundred-plus decisions a year across geographies, categories, stages and crypto tokens with a small group of people who mostly share a background. Contrary’s premise is to build a venture firm the way you build a startup: world-class people in marketing, events, community, product, engineering and talent, not just an investment team with support staff.

Whale hunters and the muddied middle. Erasmus brings up Kyle’s chart comparing venture’s 2-and-20 to whaling’s incentive structure, and asks whether the 30% super-carry should belong only to the funds hunting dangerous whales in open ocean. Kyle’s answer is that two things have gotten muddled. First, the upper extreme of outcomes became so large (Andreessen’s Coinbase position at one point returned the firm’s entire AUM, not just a fund) that people started to believe every outcome has to be massive, which ruins the water for every other strategy. A company growing 20–30% a year with unsophisticated technology could find a great home with a Private Equity buyer, but its expectations are anchored to peers trading at 80–100x revenue, and “very good” outcomes get recategorized as “very bad.” Second, investors have been incentivized to kick the can: pump the story so the next round pays up, and the next, until the public markets are left holding the buck. What got lost is the focus on the metrics and activities that make a company durable for the long term.

Everybody wants to be a salesperson. Firms that built their reputation on speed and price-insensitivity are honest about not offering value-add, and that is a fine strategy. The confusing case is the boutique partnership that grew its AUM and headcount and hired genuinely exceptional talent, data-science and engineering people, then never listened to them or gave them a career path. The investing team is the sales team, and the sales team is a committee in charge of every decision. A great talent person who wants to be at a firm for twenty years feels they have to get onto the investing team to progress, which is like running a company where engineers only advance by pivoting into sales. Kyle admits to being obsessed with org charts because an org chart reflects a firm’s values, and most firms’ values turn out to be unfortunate.

Pockets of value. The value-add proposition is fuzzy: half of VCs add no value, and they don’t know which half. Kyle’s reframe, borrowed from a Bryce Roberts tweet quoting Keith Rabois, is that founders hire VCs to improve their odds of success, and a company’s odds are a weighted-average risk calculation across founder, product, market and competitive risk. The firms he admires build their org chart around the pockets where a firm can actually reduce risk. In crypto that is research, which Paradigm built first and a16z copied. In storytelling it is the super-angels like Packy McCormick and Mario Gabriele, whose deep dives companies now send in lieu of a deck.

VC product vs. VC service. Austen Allred’s line: a product gets better the more people use it, a service gets worse. Kyle is emphatic that a VC product is not an algorithm that spits out yes or no. It is “a clearly articulated thing that can be replicated multiple times without losing the value of it.” The example is his former Index colleagues Erin Price-Wright and Kelly Toole, whose engineering, data-science and open-source backgrounds make a specific infrastructure-and-AI offering that scales across the companies it fits. Productizing depends on prioritizing: the firms that fail are the ones trying to be everything for everyone, and Tiger’s honesty about who it is and is not a fit for is a point in its favor. Contrary wants to do many things, but only for a specific subset of people.

Vibes and the unbundling. When Kyle asked friends what their firm’s venture product was, most had not thought about it. Every firm is responsible for answering for its own existence, and a growing layer of that answer is what he half-jokingly calls vibes: the individual investor’s brand, which is why he wrote The Unbundling of Venture Capital. The history runs from monolithic brands (you were “backed by Sequoia,” not by a partner) through what Erasmus calls feudalism (a16z’s bio fund, crypto fund and specialist strategies) to individuals. The frame comes from David Perell’s Naked Brands: consumers used brands as shorthand for quality until brands violated that trust and the world got too complex for one brand to cover, and social media rewired people to trust a person they feel they know over an institution they cannot see into. Founders now pick Bill Gurley or Sarah Tavel rather than Benchmark, and operators lead rounds because their vibe is articulated: Dylan Field leading Warp’s Series A, Amjad Masad and Balaji Srinivasan leading a round in Synthesis.

The future of venture tribes. Asked whether solo capitalists like Harry Stebbings will stay solo once they need a CFO and capital-call paperwork, Kyle gives his standard disappointing answer: no single trend wins. The one word for venture over the next fifteen to twenty years is change. Every model, solo, seed, multi-stage, crossover, has to answer why it should be allowed to survive in a rapidly changing competitive landscape, and whether adding a back office speeds it up or slows it down is each firm’s call.

Why Contrary. Kyle had known founder Eric Tarczynski for six years. Eric’s thesis, formed at a YC-backed company acquired by Lyft, was that if you could just stay close to the sharpest people you would be able to back them wherever they went. Contrary’s ethos is to identify the sharpest people in the world and support them relentlessly through their careers: first as venture partners at forty-plus schools, then as operators at the Series B and C companies where “what good looks like” gets learned, then as founders whose first check Contrary wants to write. Kyle leads the growth effort, investing in companies that have become talent vortexes (Ramp, Anduril, Synthesis) and pulling the community into them. The Camp Navarro offsite the weekend before recording put 250 community members in one place; people walk out having found co-founders and colleagues. Growth at Contrary means the second of three phases in a company’s life: not ideation, not “we just need capital,” but the moment after early product-market fit when the question is which resources and people scale the model, and the talent bar is the thing he will not compromise on.

Transcript

Erasmus: Welcome to another episode of Sand Hill Road, my little pirate radio station that allows me to study venture capital and the creation of technology companies by talking in public with leading operators and capital allocators. I’m quite happy that today I’m joined by a fellow student of the venture capital industry, Kyle Harrison, who’s a GP at Contrary Capital. He’s a seasoned investor with experience at firms like TCV, Technology Crossover Ventures, one of the leading and oldest crossover firms, Coatue, which is one of the Tiger cubs, and most recently Index Ventures. He has joined Contrary Capital as his renegade of choice earlier this year. Kyle, really happy to have you here on the show today.

Kyle: Really excited to do it. I’m excited to dig in.

Erasmus: What I like about you is that you are not just an investor, but you’re a content creator. You run the Substack Investing 101, which I can highly recommend to any of my listeners. You have this great quote of yourself saying that, “I wouldn’t consider myself to be the best at anything, but I’m a very observant industry spectator and commentator.” Thinking about your own content creation process, talk a little bit about how you started out and why you decided to keep churning out all this content on a weekly basis.

Kyle: It’s funny, creating content actually goes way back to the very beginning of how I got introduced to venture. A different medium, but a similar idea. Way back before I got introduced to venture, I had started a company out of school. It was a creator marketplace. I like to joke that I started a creator marketplace before it was cool. I was a videographer. In addition to my own random creations, I was producing commercials and wedding videos and stuff like that to pay the bills. Eventually I had too many clients, and so I started farming them out to other creatives and taking a small percentage. Eventually I found myself doing that full time. I was getting jobs for photographers, graphic designers, videographers, whatever. A lot of fun. I ran that for about four years.

At the time, I didn’t think that I could continue to grow it, so I ended up selling it. In that process I got introduced to the idea of venture. I had no idea what venture capital was. I didn’t even really call my business a startup. I just wasn’t in the zeitgeist at all. But as I got introduced to venture, somebody described it this way: when I looked at my business, I had all these passionate creatives, and I loved being a resource for them that they could rely on in their journey. When somebody heard me describe it that way, that that’s what I really liked to do, they said, “Well, that’s kind of what venture capital does.” That was my intro to venture.

I spent about a year at a seed fund in Utah, where I’d run my business, and got introduced to the business of venture and the mechanics of it. But I very quickly realized I wanted to see lots of different types of companies, of all shapes and sizes, not just seed-stage companies. So I jumped to TCV and had a great education. I joke that I’ve seen the three flavors of venture. When I was at TCV, it was very private-equity-esque in the way that they did things and the types of investments they made, and a lot of the investments that I made were shaped by that style. I then went to Coatue and saw the hedge-fund style of venture investing, which is very different, very focused on finding very large markets. And then for the last few years as a partner at Index, I got the chance to see venture classic, the traditional model of venture investing.

Across all those three models, there were two discoveries that led me to wanting to produce content and think about venture and be very open about the model. Number one is that I’d seen so many different styles that I constantly had all these ideas rolling around in my head of how different types of investors make different decisions, and how that impacts them for better or for worse. That rumination was very much there. The second piece was that, while I’m very grateful to the firms I worked for for the things that I learned, while I was at Index I found myself wanting to dig into a little bit more of a startup vibe. At first I thought maybe that meant I wanted to start another company. But I really loved investing, and so I thought, what does joining a startup venture firm look like, something younger in years? I’d known the folks at Contrary for a long time. As I thought about what kind of firm I would want to help put my fingerprints on, I went through all of these questions that you see in my writing. The reason I call Contrary my renegade of choice is that I started thinking about all the different ways venture is changing, and when I thought about the trends that I was personally most excited about, Contrary embodied all of them. That’s what led me to joining the team.

Erasmus: And we’ve moved straight to the end [?], that you joined Contrary Capital earlier this year, I think it was in May. Interestingly enough, there was a time of research, reflection and writing that preceded that, where you did an intense period of a couple of months where you talked, I think, to ninety different investors. You had a number of pieces outlining your thoughts on different strategies and sub-strategies. You summed it up nicely, saying, “Last year I found myself at a turning point. I was starting into my thirties, I was about to have my third kid, I’d experienced one of the craziest startup markets I’ve ever seen. In the last ten years in venture I had worked at three different venture firms and worked with folks at countless others.” That’s when you really took this step away, where you also did a lot of thinking and soul searching. Maybe talk a little bit about this time of reflection earlier this year.

Kyle: One of the things I joke about is that for a world steeped in innovation, where technology is constantly evolving, venture is probably one of the most under-innovated models out there. The idea that venture had sort of stayed largely the same had at first struck me as a sign of stability: you just keep doing the things you’re doing. But thinking about intellectual honesty and decision-making and reflecting on your own decision-making processes, I reflected on all that, and it made me appreciate that I didn’t know the answer to a lot of the questions. Why do we do the things the way that we do them? Is that good or is that bad? Does it lead to good decisions or good cultures?

Before I dove into helping to put my fingerprints on a firm and help drive it in a direction, I wanted to make sure it was the right direction, that I believed in the direction it was going, as well as think about my place in the overall ecosystem. I think every venture firm is responsible for answering the question of why they should be allowed to survive in the market, what their unique process and value proposition is. Before I could answer that really honestly, I needed to dig into what other folks had done and how they make decisions.

What I found was that it’s even more fun to be a venture investor when you’re really stepping back and reflecting on the overall process, and you’re not just doing the day-to-day. My dad calls it the SALY principle, “same as last year.” You’re not just doing things because, I don’t know, that’s the way we did them last year. You’re actually being thoughtful about whether this is the best way to do these things, or make these decisions, or hire people, or build a firm, or whatever. My exercise really helped me get under the hood on that stuff.

Erasmus: I love that. And you touched on it already: there’s this paradox in venture, where venture is trying to find the most innovative companies in the world, but the venture model itself has stayed largely the same for the last fifty years. You have the 2-and-20 model, two percent management fee, twenty percent carry. It largely stayed the same, the recurring management fee model. Obviously there were a couple of renegades that said, “Let’s use that management fee and actually produce value-adding services to founders.” That was one of the a16z innovations: they actually used the management fee to build a media company with a venture firm attached to it. That was one of those things that people thought was very innovative. But this core idea, that you have this under-innovated model at the core of the innovation industry, I think that’s a pretty interesting take in one of your pieces. Maybe you can expand a bit on this.

Kyle: One of the things that I think a lot about is that there are certain sayings folks use for how venture strategies are dictated. One of them is that the size of your fund is your strategy. There’s a reason why folks like Benchmark have kept their funds fairly small: their model doesn’t scale to having two-and-a-half-billion-dollar funds. So your fund size is your strategy. At the same time, the folks that go out and raise two, three, four billion dollar funds actively have to be deploying a significant amount of capital, in large quantities, into companies that have the potential to return significant amounts of capital after the fact. All of those represent different strategies.

But by and large, how a firm’s strategy is dictated and carried out has always revolved around the partnership itself, these select few individuals at the center of the universe. In some of the smaller organizations, I think that model can do okay. There are certain things you have to be cautious of: are you really bringing in the best partners, and are they making decisions not because of internal politics and those kinds of dynamics but because they think it’s the best decision? If so, that’s great. But it’s really the firms that have tried to be much larger where I think the model has kind of broken down. When you’re making a hundred-plus investment decisions a year across different geos and categories and sizes and stages, and when you look at crypto tokens and things like that, there’s a huge variety, and yet it’s still largely driven by a select group of folks, many of whom have the same backgrounds.

One of the principles at Contrary that we think a lot about is: can you build a venture firm more similarly to the way that you build a startup? Rather than having this general partnership at the top that dictates every aspect of strategy, can you have world-class folks, whether it’s in marketing and events or community or even product and engineering and talent? Can they truly be world class? In most venture firms, because the partnership is so central to this model that’s been the same since the fifties and sixties, and even before that, the model’s been very consistent. Innovation in that model is going to come largely from whether you can bring in really great people and build a unique, differentiated value proposition with those people, beyond just the investment team. Can everybody come together and build a really differentiated product? That’s not easy to do, and it’s a super competitive space right now. So I’m very excited about how venture is going to evolve as folks introduce new models and ways of doing things.

Erasmus: To expand a little bit on this “your fund size is your strategy”: I like this piece you have comparing the incentive structure of venture capitalists with that of whale hunters. You have this chart where you basically say that the way whale hunters used to be incentivized was pretty similar to this 2-and-20 structure, because you had such high risk going out there hunting for whales, you had almost similar returns to what you have in venture capital. And you’ve been at three different firms: TCV, the typical crossover firm; then Coatue, coming basically out of the public markets into the private markets; and then Index, coming from the very early stage, growing, and having a growth fund attached to it. So you’ve had basically three sides of the table when it comes to fund sizes and fund strategies.

To bring this back to the whale hunters: if they hunt for the dangerous whales in the middle of the ocean, then you obviously have to give them a thirty percent carry, because they’re risking their lives. But they could say, “We’re going to hunt for smaller whales, we’re going to go closer to shore.” It gets a little bit the same in the private equity industry. You have those large-cap buyout funds targeting the 2.5x leveraged buyout situations; they’re not going after the 10x fund return. And then you have the early-stage funds, who really depend on the binary outcomes, one or two fund returners. Those would be the ones that really deserve the thirty percent super-carry. How do you think about the incentive models across the different whale categories that you’re going after in the market?

Kyle: I think there are two things that have gotten kind of muddled in the last few years. One thing is the intense focus on the binary outcomes. The upper extreme of those outcomes became so significant. I think at one point Andreessen’s investment in Coinbase alone had returned their entire AUM, not just an entire fund but their entire AUM for fifteen, twenty years of investing. Those kinds of outcomes are massive. And because it’s so big and so significant, it’s made it very fuzzy, where folks think that every outcome has to be a massive outcome. What’s missing from that is the nuance of, again, the idea that your fund is your strategy. You can have a different strategy going after very different things. But when it gets so noisy, when you think that everything can be this massive outcome, it actually ruins or muddies the waters for every other strategy, because it takes up so much interest and attention.

As a result, you get companies that are not growing exponentially, they’re growing twenty, thirty percent, they’re much smaller in scale, their technology is much less sophisticated typically. They could potentially find great homes with private equity investors who are willing to buy the company and help do a lot of different things to improve their margins and the overall health of the company. But those folks have their expectations set on, “I’m looking at these folks who are trading at eighty, a hundred times revenue, I should at least be able to get fifty times revenue or something.” It just dilutes that dynamic within private equity. Similarly with early-stage firms with very specific focuses that have specific return thresholds: it makes it much harder for them to succeed, when every company that is probably not going to be one of these massive outlier outcomes but is going to be a very good outcome, those outcomes go from very good to very bad, because they get muddied with all this emphasis on big stuff. The incentive for the last few years has pushed people to say every company has to be a multi-billion dollar company with a path to being a trillion dollar company. That’s just not true, and that’s okay, but it’s gotten very fuzzy. So that’s one bucket that’s made it very difficult.

The other bucket that I think has gotten very messy is what investors are being incentivized to do versus what they should be incentivized to do, which is to build long-term durable companies that can be very successful for the long term. Survival should be a big focus for these companies: survive and thrive. Instead, what investors have been incentivized towards is kick the can down the road. If we can just pump up how big the story is and how big the outcome can be, somebody else will pay up, and somebody else will pay up, and somebody else will pay up, until eventually you get left with, a lot of times, the public markets, which suffer from that intense passing-the-buck game. What investors have lost sight of is the metrics and KPIs. Focusing on the next fundraise should not be the core focus. What you should be so focused on is how do we most effectively drive the metrics and activities that will lead to a successful company long term. I think we’ve lost sight of that in this hype cycle that we’ve been in for the last few years. But again, I’m very excited about the models that can step back and say, “Listen, we need to focus on how we build the strongest relationships with the sharpest people who are tackling the best ideas and the biggest problems, and how we can do that in a way that’s meaningful and durable.”

Erasmus: I think that’s an interesting observation of yours, that it has really been about kicking the can. A lot of angels basically pattern-matched on who’s going to be a potential pre-seed or seed investor, and then the seed investors on who’s going to lead the A, who’s going to lead the B, and the Series B investors are looking for an exit candidate. This almost Ponzi-scheme-ish pattern of the industry, where you don’t build quiet companies, home companies, that can survive on their own.

Going again a step back to the general partnership model and the firm structure. You mentioned the venture model itself has stayed largely the same for the last fifty years, not only the funding model or the incentivization model with the 2-and-20 carry structure, but also the general partnership. Obviously those people driving those whale boats have been the same actors, the general partners, those who own the GP and who get most of the carry. It’s been a very partner-centric, or investor-centric, culture within these venture firms. You have this analogy that it’s like an organization where everybody wants to be a salesman, and the sales people drive operations, they drive technology, they drive everything. You have this clear divide between everybody who’s a GP and then the ancillary non-investor functions. I think you outline this quite well in one of your posts. Maybe you can speak a little bit about this divide that you’ve seen across the industry, talking to so many capital allocators.

Kyle: In my mind, the way that I think about this model goes back to this idea that it’s not a one-size-fits-all strategy decision. Not every firm has to look like every other firm. Firms can look very different. They can have different types of people and different types of decision-making processes. A lot of these large crossover firms that have built their reputations on speed, and to some extent price insensitivity, are not focused on any of these non-investor value-add models. When they articulate their value proposition, it isn’t, “Hey, we’re going to help you and be the strategic advisor that you can call at two in the morning and get advice from.” It’s, “We’re purely here to allocate capital that you need to grow, and it’s kind of on you to be able to go and execute on that capital.” That’s totally fine. That’s the strategy, and if you’re a founder who feels like that strategy could fit, great.

What happens is that firms who have been built up in this boutique GP relationship, where it’s largely these five or six or seven people around a table making all the decisions and dictating the strategy and acting themselves as the value-add, most firms grew up thinking about things in that way. As they’ve grown in AUM, they’ve realized, “We need to be doing a lot more to be able to justify folks taking our money and staying competitive.” But they have raced towards the headcount and the AUM and things like that without rethinking the org chart and the structural dynamics of how folks progress in their careers.

What is confusing to me, when I look at a lot of these firms that have really exceptional talent people, or data science people, or even engineers or business development or what have you, is that those firms will hire really high-quality people and not always listen to them very much, or not put them in a position where they can be really helpful, or make really significant decisions, or build an organization. It goes back to this analogy you mentioned that I shared, where it’s effectively like the investing team is the sales team, and the sales team is a committee that’s in charge of every decision and everything. You might have somebody who’s a really high-quality talent person, for example. They’re really well connected, they’re very good at identifying high-quality talent early on and building relationships with them. But if that person looks at, “Hey, I want to be at this firm for twenty years, how does my career progress?”, many of those folks feel like they need to get on the sales team, that they need to eventually transition to the investing team.

In my perspective, there should be a better structure where you can enable somebody to be really good at what they do. You’d probably have really bad engineers if they were constantly thinking about, “Well, how do I get out of engineering and into sales?” In the same way, you should enable talent people to be really exceptional at what they do, and feel that they have a long-term path where they can start to take on more responsibility and have more economic reward as they help build the firm. By and large, that just doesn’t happen today. I joke that I’m obsessed with org charts, because I think org charts really reflect a lot of your values. For most firms, it’s sort of unfortunate what their values end up being, based on what their org chart is.

Erasmus: I love this analogy with the sales team dictating everything. Basically, what are the incentives for someone who’s, let’s say, a data scientist at a top-tier venture firm to keep doing data science, when eventually you have to become a partner or principal, you have to present in the IC, because otherwise you’re more like an ancillary service? In one of your posts you’re rethinking the org chart for venture firms, and you have some examples. Paradigm, which is Fred Ehrsam’s spin-out of Coinbase, backed heavily by Sequoia. But then you also have this example of Kim, when she left Coinbase and joined Andreessen Horowitz, she joined as the chief marketing officer. You gradually have some firms who try to adopt a more traditional org chart, that looks more like a typical corporation rather than a venture firm.

Kyle: For me, and this extends to Contrary as well, Contrary even before I got here has been very thoughtful about how you can build a venture firm more similar to a startup. Not to say that everything is exactly the same, but one of the things that I get very excited about is folks that recognize the pockets of value that can be created. There’s the meme of VCs asking how they can be helpful. It’s kind of akin to the joke where they say fifty percent of your marketing budget is wasted, you just don’t know which half. Sometimes it feels like fifty percent of VCs don’t add any value, they just don’t know which half they’re in. The value-add proposition is very fuzzy.

The thing that I think some of these firms are catching on to is: where are the pockets of value they can create for a company? There was a tweet a few months ago by Bryce Roberts, and I think it was Keith Rabois that said it: what is the number one thing that entrepreneurs are hiring their VCs for? If you had to sum it down, it’s improved odds of success. You’re trying to improve your odds of success by bringing on somebody else who can help. So I’ve started to think about a company’s success, or their odds of success, as this weighted-average risk calculation. Everything from founder risk to product risk to market risk to competitive risk, whatever it is. All of those risks exist for a company, whether you like it or not. Then you start to ask, well, how can we reduce the risk in each of these facets as much as possible? Venture firms are starting to build their org chart around those pockets of value, or those pockets of risk reduction, if you will.

In crypto, because it’s such a frontier category, where the technology really is cutting edge, trying to create these economic models that can leverage specific pieces of technology, it’s very early. Even the folks at Paradigm acknowledge that. So within their crypto efforts, what’s the org that they build to be able to limit the risk for some of their companies? They build a pretty robust research organization, because there’s a lot of unpacking that needs to be done in this technology. They build research, and then Andreessen’s crypto effort takes a note out of their book and does the same. Research is becoming this really valuable thing within crypto.

You see folks doing the same thing within marketing: Andreessen’s launch of Future, or even some of the super angels that have popped up. You’ve got folks like Packy McCormick and Mario Gabriele. They can be really valuable investors to bring in, because they have such a significant following, and people so appreciate their thinking and their frameworks, that they’re really valuable. You can bucket that in marketing, you can bucket it in a lot of different ways, being able to tell your story or whatever. But the number of companies now that have reached out, since I talked to them, in lieu even of a deck sometimes, and said, “Hey, you should really read Packy’s deep dive or Mario’s deep dive, because it tells our story so well.” Those folks have identified a pocket of value where they can help reduce the risk of a company’s ability to tell their story. I love how these firms are finding these pockets and then saying, “All right, how do we build a world-class organization within that pocket?” Not “How can we find a thing that’s kind of nice marketing fluff that we can talk about to LPs and founders, but really it’s us who are dictating everything.” It’s really trying to structure these org charts around the pockets of value.

Erasmus: I love that. To bring that back to your analogy of the candle shop: the founder who has some level of product-market fit can basically choose his investors, and it’s like walking into a candle store. For him, every candle smells and looks the same, more or less, and it’s really hard for them to distinguish. Everybody’s saying, “How can I be useful?”, but who is actually useful? You have this quote from Austen Allred from Lambda School, who said that VCs should be building a product and not a service. What’s the difference between a product and a service? The difference is that if more people use it, the product gets better, while the service gets worse. It really scales with the number of iterations. Maybe you can talk a little bit about building a VC product versus a VC service.

Kyle: One of the things I get some pushback on when I talk about this: everybody jokes about how at one point Google had kind of an AI bot where they could put in company details and it would spit out a yes or no. When I talk about a VC product, that is not what I mean at all. It’s more this idea, and Austen articulates it really well, that if you have productized something, it is more scalable. A service, by definition almost, is very niche and customizable to a particular experience. It can be great for individuals, but the more people you do it for, the more spread thin you are and the worse it gets.

This also goes back to the “your fund size is your strategy” discussion. If you keep a small fund, it can be okay to have a VC service. If you’ve got one person, and they’re your board member and your advisor, and they will support you based on their expertise and knowledge, that’s awesome. If you try to raise larger funds, or if you try to do lots of different things for a firm and you have lots of companies taking advantage of it, it doesn’t necessarily scale very well.

The way that I describe productizing things in venture is: it’s a clearly articulated thing that can be replicated multiple times without losing the value of it. One example that I give is some of my colleagues at Index. They’re phenomenal at what they do. Many of them have backgrounds in engineering, in data science, working in open-source companies and working with pretty sophisticated AI. So there’s a very specific infrastructure-and-AI “product,” if you will, at Index. There are a few folks, Erin Price-Wright and Kelly Toole and some of the team there, who have worked with a bunch of different companies. They’re very good at that specific thing. Are they going to be great for everyone? Not necessarily. But within their core area, they can scale actually quite well, because the lessons that they’ve learned are very applicable to the folks that they’re working with. There’s no SaaS interface for that product. It’s still people, it’s still individuals interacting with other individuals. But it’s productized in the sense that it’s very well articulated.

One of the things that a lot of firms have not done as well is that they want to be everything for everyone. At some point, the ability to productize also depends on the ability to prioritize: being able to say, “Listen, we’re really good for this area of people, and this kind of founder, or this industry, or this kind of business model. We’re really good for them. There are going to be some people that’s not a good fit for.” I think that’s one of the things that Tiger has done pretty well, in saying, “Hey, we’re a good fit for certain folks, we’re not a good fit for everybody,” and it’s up to the founder to be deliberate about whether this is the right fit for them or not. It’s the area where folks try to be too much for too many people that doesn’t scale.

At Contrary, one of the things that we think a lot about is that we do want to do a lot of things. There are several different aspects of Contrary’s flywheel, so to speak, that exist and that we want to do. But we want to do it for a very specific subset of folks, where there’s a specific group of people and a certain kind of signal where we say, “That’s where we can add a lot of value.” There are certain aspects where we’re not going to add that much value, and that’s okay. We don’t need to get involved in those investments with those companies. It’s about finding the investor-founder fit that our product is a good fit for.

Erasmus: In your time reflecting about joining Contrary Capital, you spent some time talking to people in your industry. You have some iMessage screenshots where you reached out to some friends saying, “Have you thought about what your firm’s venture product offering is?” And you were surprised that there was surprisingly little thought process in some instances. That obviously has shaped you into being much more deliberate in that regard.

Kyle: In the conversations I’ve had with folks, and this is true in startups as well, you don’t want to be a commodity. You don’t want to be a person who’s selling the same thing as the next fifteen vendors, with absolutely no difference in what you’re doing. You want to be different. I go back to this idea that every venture firm is responsible for answering for its own existence, answering the question themselves: what is your unique value proposition? There hasn’t been enough of that.

A lot of the folks I work with are often at a similar stage of career to me. They’re the rising generation. They haven’t been doing this for twenty-five years, but they’ve been doing it long enough that they know what a company needs and what can be valuable. So they’re trying to articulate for themselves, in whatever role they’re in, “How am I going to answer that question? What is my unique value proposition? How do I differ from other folks?”

The one bucket that is most important, and sometimes people think that I disregard it in my writing, is that there is a layer of choosing an investor that I joke is really just vibes. It’s one of the reasons I wrote one of my pieces called The Unbundling of Venture Capital, where it focused very much on the individual brand and characteristics of the investor becoming increasingly more important. It’s not because the world is going to break down into a giant army of solo capitalists. I don’t think that’s the case. I think there will be certain folks that’s a good model for, and that’s awesome. But whether you’re in a big firm or a small firm or just an angel investor, your brand, or your vibe, is going to become increasingly more important, because it’s really difficult for founders to know who they vibe with. So you need to do a good job of crystallizing and articulating what your vibe is, and what you’re good at, and what you can offer them, or what your firm can offer them. One of the things that I hope some of my writing will push people to do is to more articulately answer the question: what is my unique value proposition, where do I fit in the world? And to start to focus their efforts on where they can be most meaningful, and be okay missing out on some of the things that maybe they weren’t a good fit for. That’s going to be where this VC value-add conversation starts to go, as people try to really identify what they can be world class at.

Erasmus: This brings me to the next piece of yours, which is this history of venture capital, divided into three stages. One is the monolithic brands. It used to be that you would be funded by NEA, by Sequoia, and it wouldn’t be so much about the partner. It was this one-brand firm: if Sequoia led your round, Sequoia led your round. Then we had this great shift, now at the very extreme really those solo capitalists, the Harry Stebbingses of this world, the Lee Fixels spinning out. I think you have other examples like Serena Williams, Elad Gil, who are recognized on their own as the super angels. You have this era of monolithic brands, then the renegades on the other end, and in between this trend of feudalism, as you call it, where you had some of these large top-tier firms branching off into different strategies, Andreessen Horowitz having a bio fund, having a crypto fund, having these niches to differentiate the product. Maybe talk about this really interesting piece of yours.

Kyle: The original idea for the Unbundling of Venture Capital article, where I explore this evolution, part of it actually came from an article that I really love. It’s called Naked Brands, by David Perell. In it, he talks about how, for basically forever, for as long as marketing has existed, consumers have used brands as shorthands for quality. We don’t always know all the information, but I know that Coca-Cola is high quality, so if I have to choose between some random cola that I don’t know and Coke, I know the brand, I’m going to trust that brand. That was the monolithic brands example.

Over time, and this has happened in venture, this has happened in government, in lots of different industries, what’s happened is, number one, brands have done some things that have violated the trust that people had in them. People have lost some of the confidence in knowing that they could just say, “I don’t need to know everything, I know that so-and-so is great.” Then some bad things happen, or some products are really low quality, and the trust in that brand gets diminished. That’s one thing. The second thing is that the world has gotten dramatically more complex. Rather than being able to trust that this is good for everyone in every situation, you started to break off and say this area really deserves its own focus and attention, and it’s big enough that it deserves that. The way that’s translated in venture is that you’ve gone from the monolithic brands doing everything to the example you described, where you look at Andreessen and they have multiple different strategies, and those strategies are able to focus around a specific area and give it its own attention.

What has happened, basically since the rise of social media, is that now, rather than taking brands as a shorthand, or even a hyper-focused aspect of a brand as a shorthand for quality and something you resonate with, people have been more exposed to each other’s lives. On social media you see into even super famous people’s personal lives and their experiences and their values and personalities, and you resonate with that. In the pop culture world, where you have LeBron James or Kim Kardashian, you start to resonate with those individuals. Social media has kind of rewired our brains, where we’re anxious about the big monolithic brand. We don’t know what’s going on in there, we don’t know who’s running the ship, we don’t know what they’ve done before, they’re not telling us. But when you look at a person, you feel much more comfortable that you know that person, whether or not you do. Marketing is just as effective for an individual as for a brand; different people are better at discerning.

In venture, I think that dynamic has occurred, where people are much more focused on the individual. You’re right to the point where it used to be that you would just choose Benchmark because you chose Benchmark. Now people still choose Benchmark, and they’re still a great firm, but more often than not they specifically choose a Bill Gurley or a Sarah Tavel, because they vibe with that person. So whether that vibe, or that brand of an individual, exists in a big firm, in a small firm, in a solo firm, or just as an individual angel: at Contrary we’re investors in Warp, a Series A company where Dylan Field, the CEO of Figma, led their Series A. We’re investors in Synthesis, which is an anti-school that’s just a phenomenal business, and they had their recent round led by Amjad Masad, the CEO at Replit, and Balaji Srinivasan. These individuals are stepping into roles where they can lead rounds, because their vibes are very well articulated. Founders can know, “Hey, I vibe with this person, and if the capital is there and those people can lead their investments, I can turn to a Dylan or I can turn to an Elad Gil.” As that personal unbundling of venture occurs, what is most important is that founders recognize their ability to say, “I’m going to choose an investor because I vibe with them, not just because of the brand of the firm.” Contrary is no different. We focus very much on personal relationships, beyond even specific brands or anything like that.

Erasmus: Thinking long term: you have top operators, top founders, who are coming to the market with their small rolling fund, getting a start in the venture industry, oftentimes in parallel to actually running their startup. There’s the famous example of the Superhuman founder investing his rolling fund in parallel to building Superhuman. You see more and more of those examples. You mentioned the example of Harry Stebbings, who obviously started out as a 21-year-old becoming one of the world’s most successful podcasters, then partnered with Fred Destin from Accel and started a venture firm, but now has spun off again and is a solo capitalist. But I heard Harry, for example, talking about how, as he’s scaling up now with two fund offerings, I think he has an early-stage fund and a growth fund, he’s having to deal with more and more paperwork. There are benefits of being part of a larger franchise, where you have a CFO, where you don’t have to take care of capital calls and all this administrative stuff. How do you think about how this is going to play out in the long run? Will there still be tribes, or will the solo capitalist be the new normal, the new IC, where you can just do whatever you want?

Kyle: One of the questions that I get the most, because I’ve written so much about different models in venture, is: what is the thing, or the trend, that’s going to take the day? The most important trend that’s going to change venture. Is it crypto, and being able to decentralize away from these centralized firms? Is it solo capitalists? Is it Tiger and crossovers, and big firms becoming massive pools of innovation capital? What are all these things? My answer is always disappointing to people, because it’s not as sexy as they might like. It’s not any one thing, it’s everything. If I had to use one word to describe venture over the next fifteen, twenty years, it’s change. Even though the markets have gone up and they’ve come down, the reality is that the world is changing. It’s not just economic, where in a bear market it’s this and in a bull market it’s that. The world is changing. The way that people consume information is changing. How they build businesses and build teams and recruit, all of those aspects are changing. Whether the established players in venture like it or not, venture is going to change as well.

What’s going to drive that change? It’s all of those things. What is not going to change is this idea that you still have to answer for your own existence. When I look at the solo capitalists and folks in these small firms, well, what are they going to do? Are they going to stay solo? Are they going to grow? It’s up to them to decide not only what works well for them, but also what gives them enough of a foundation to survive and thrive in a pretty competitive world. If folks like Harry are going to bring on a back-office team, they have to decide: does that slow them down or does that speed them up? Does that give them more right to live, or does that make it harder for them to survive? That’s going to be true in solo capitalists, that’s going to be true in dedicated seed firms, that’s going to be true in multi-stage firms, it’s going to be true in crossover funds. Everybody has to be able to answer that question of why they should be allowed to survive in a dramatically and rapidly changing competitive landscape. I think that’s the most significant thing that everybody’s going to have to deal with.

Erasmus: I think what’s interesting is we’ve gone through a couple of iterations in the last two decades. It used to be that TCV and Meritech would dominate the growth space. Then you had Yuri Milner with DST moving into the market. Then you had Masa with SoftBank moving in, and then Tiger, obviously, in the last iteration of this crossover strategy. It’s so dynamic that every couple of years you see new players, new models popping up. I think it’s going to stay quite dynamic.

As we have ten more minutes on the clock, I want to spend some time on Contrary. You have a piece on why Contrary Capital is for you, after all this research, all this deliberation, time to reflect and talk to many industry players: why Contrary is your renegade of choice. You contrast it to a Sequoia or Kleiner Perkins, which are more company-centric, transaction-based, versus a Y Combinator or Techstars, which are really community-centered accelerator programs. You put Contrary in that community-centered bucket. I just saw some pictures of the Contrary Capital offsite, which I think really speaks to that community-centered element of Contrary Capital. Maybe you can elaborate.

Kyle: Credit where credit is due. I’ve known Eric, who’s the founder of Contrary, for six years, since he was just starting to think about Contrary. He himself had worked at a YC-backed company that got acquired by Lyft. His realization, his early thesis, was that both in college and afterwards in the startup world, he was constantly surrounded by super sharp people, and he thought to himself, “If I could just find a way to stay close to these people and back them in whatever way possible, I would be able to have significant success from that, just by staying plugged into those sharp people.”

Over time, what that became was Contrary’s core ethos, which is: identify the sharpest people in the world, and build and support them relentlessly throughout their career. What that means, in the early days of Contrary, was identifying the sharpest people at over forty different schools across the country, in graduate and undergraduate programs, and bringing them into a venture partner program, where they would work as scouts with us and get to learn alongside us in identifying really high-quality businesses. But by doing that, we would identify who those sharp folks were that we worked with as venture partners, and then we’d stay close to them. When they graduated, if they went to their first job, whether it was working in tech or whatever, we would stay close to them, be a resource for them, offer them a bunch of different components of the community that would support them in their journey. If they go and start a company, awesome, we want to be their first check.

One of the reasons I joined Contrary is: if they want to go work at a Series B or a Series C company, and really learn, at a different business, what good looks like, so that once they do start a company they have that experience, awesome, they can go work at those companies. We can help them. We go find those companies. But then what I want to do, leading the growth effort at Contrary, is also invest behind those people. If we know they’re super sharp, and we know that they’re congregating in some of these phenomenal businesses, those are probably good companies to invest in, even at the later stages, even if we didn’t invest in those companies at the very earliest days. That’s what we’ve done, investing in folks like Ramp and Anduril and Synthesis and the others I mentioned. We’ve identified those companies that have attracted really high-quality talent. I refer to them affectionately as talent vortexes: these companies that have built up a unique enough culture and a unique enough vision that they’re able to attract really high-quality people. A lot of my growth investments, even if there aren’t Contrary community connections there, I’m able to go and identify those companies I see as early budding talent vortexes, and help bring the community into those companies as well.

So whether the community is pulling us towards some great companies, or we’re helping invite those community members to some phenomenal companies that we’ve met, the model is that we’re constantly trying to identify what are the products or services or different offerings that we can launch within the Contrary community that will keep us close and help us build affinity with these really sharp people, and then just let them tell us where the most exciting opportunities are, because we know that they’re sharp and we know them super well.

To your point, that was one of the things this past weekend. We had a phenomenal event at Camp Navarro, just a few hours north of SF. We’ve got several hundred folks in the community, and we were able to get about 250 of them at this event. We had a bunch of speakers, we had founders, we had other investors, we had all kinds of opportunities to share what we’re learning and the opportunities we’re seeing in the community. One of the best things is we have a lot of folks walk away from those events and they have found their co-founders that they’re going to go start businesses with, or they found the people who are working at the companies that they now want to go work at, and are able to help recruit each other. Because we’ve been so people-centric for years, that’s starting to compound, where we’re leading seed investments in companies of folks we’ve known for years, and we’re making growth investments into companies where phenomenal folks have gone to work that we’ve also known for years. This is just beginning. I can’t even imagine how powerful that flywheel is going to be ten years from now, when folks have continued to advance their careers. That was the biggest reason I was excited to join Contrary: as venture becomes unbundled, and as relationships become more critical, I wanted to be at a place that, from the very earliest days, was building the deepest relationships with the sharpest future founders that I could.

Erasmus: Very interesting. And if you’re true to your roots, doing growth investments, how does it look on the practical side? Growth investors sometimes get a bad rep, being called spreadsheet investors, where it’s more about the cohorts, looking at different churn rates, looking at the LTV-to-CAC ratios. Your model seems to be quite different. Now that you’re at Contrary Capital, is that out of a main fund or is it a dedicated growth fund? What’s the typical entry stage, Series B, an early Series C? How does it differ from other models?

Kyle: I think there are three very distinct phases that a company goes through in its life. That first phase is very much about the person finding a problem that’s worth solving and ideating towards that problem. We have an early-stage team that’s super focused on that phase. They’re doing pre-seed and seed investing primarily, some Series A, but it’s very focused on those people who are solving problems and iterating.

Where I step into the puzzle is basically the idea that somebody has ideated something really compelling, they’ve started to build something, they’ve started to get some early customer interest, and they’ve identified the early inklings of product-market fit. But it’s very early, and there’s the opportunity to come in as a growth investor to effectively pour fuel on that fire. They’ve started to nail down some of the core pieces of their model, and now it’s a question of how we get the resources and the right people in place to really scale that model. That’s the second phase, and that’s where we’re really focused, primarily Series B and Series C investing. We can flex to some Series As that are maybe a little bit later, and we can go all the way up to pre-IPO rounds if we want to. But it’s very much about how we identify those companies that have product-market fit, the economic engine starting to turn, and, most importantly for Contrary, the talent vortex. It’s really powerful. We don’t necessarily want to invest in companies that are just, “Oh, we’ve just got to get butts in seats, let’s just bring folks in.” We want to invest in folks that are maintaining a ridiculously high talent bar, because those people are going to be the future iterations. Once they do super well in this company, we want to help bring them into the community and start companies of their own someday.

Then that third phase, which I’ve done a little bit of in my career but we’re not as focused on right now, is the point where it’s, “Hey, at this point we just need capital. We’ve got our advisors, we’ve got our management team, we’ve got all the right things in the right place. We just need cash to fuel the engine.” We’re not as focused on that. We’re focused on being a meaningful partner to folks, to help them put the right people and the right pieces into the right places. So really the early growth phase.

Erasmus: As we’re running against the clock, where can people find out more about you?

Kyle: I mentioned the Substack. I love getting to interact with folks on Twitter. You can see a lot of my writing there, and links to my other work and more information about Contrary. So on Twitter, @kwharrison13 is the best way to get in touch.

Erasmus: Perfect. Thank you so much.

Connections

  • The essays this episode walks through, in order. Erasmus structured the conversation around the pieces Kyle wrote during the 2022 reflection period between Index and Contrary:
  • Later essays that extend the arguments here: You Don’t Want My Value Add (October 2023) on the fuzzy value-add proposition and “fifty percent of VCs add no value”; The Hits Business, The Bifurcation of Capital is Inevitable and Venture Capital’s Fourth Turning on fund size dictating strategy; Index Bets — From Products to People on investing behind people rather than products; and the Renegade Spotlight — Paradigm / Renegade Spotlight — Synthesis / Renegade Spotlight — The General Partnership series on the firms named as examples.
  • Frameworks:
    • Fund Size — “your fund size is your strategy,” with Benchmark as the small-fund case and $3–4B funds as the deploy-large case.
    • Unbundling and the Solo Capitalist — vibes as the individual investor’s brand; Kyle’s answer that no single model wins and the one word for venture is change.
    • Product-Market Fit — the three-phase model of a company’s life (ideation → early PMF and scaling → “we just need capital”), with Contrary growth focused on phase two.
    • Incentives — kick-the-can fundraising vs. building durable companies; the “very good outcomes become very bad” effect of anchoring every company to the outlier.
    • Private Equity and Crossover Funds — where the muddied middle of the market could find homes, and the TCV → DST → SoftBank → Tiger succession in growth investing Erasmus sketches.
    • Intellectual Honesty — the reflection-period discipline of asking why firms do what they do rather than the SALY (“same as last year”) default.
  • People: Erasmus Elsner (host), Eric Tarczynski (Contrary founder), Erin Price-Wright and Kelly Toole (the Index infrastructure/AI “product”), Bryce Roberts and Keith Rabois (“improved odds of success”), Packy McCormick and Mario Gabriele (deep dives in lieu of a deck), David Perell, Bill Gurley, Sarah Tavel, Dylan Field, Amjad Masad, Balaji Srinivasan, Elad Gil, Harry Stebbings, Fred Destin, Lee Fixel, Fred Ehrsam, Kim Milosevich, Serena Williams, Austen Allred.
  • Companies and firms: Contrary, TCV, Coatue, Index Ventures, Benchmark, a16z, Paradigm (Company), Tiger Global Management, Sequoia, Kleiner Perkins, NEA, Y Combinator, Techstars, Coinbase, Warp, Figma, Synthesis School, Replit, Ramp, Anduril, Superhuman, Lambda School, Meritech, DST Global, SoftBank, Lyft.
  • Companion appearances: Navigating the AI Investment Landscape (Redefining AI, September 2023) covers Contrary’s talent network from the AI-investing side; this episode is the fullest spoken version of the 2022 “why Contrary” argument.