Why VCs Care More about Marketing than PEs and Hedge Funds

Sep 14, 2018

Matt Conger

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"Please list your LinkedIn and Twitter accounts." This question is increasingly part of the interviewing process for investment team roles at venture capital firms. Whereas most firms may want the social media accounts of their applicants for risk management purposes, VC firms want these accounts to see how broad their network is.

This is pretty surprising at first. Investors are thought to be sages whose ability to invest depends on their ability to synthesize what's happening in the world and focus those insights into investment targets. Does it really matter if they have 100 or 100,000 followers on Twitter?

The reality is that dealflow and sourcing are the beating heart of any VC firm. If associates aren't meeting several companies per week, then they aren't doing their job.

There's also the simple matter of how VCs make money. By design, the returns of a VC fund is predicated on one or two major successes per fund, whereas a private equity firm is generally expecting each investment to be a modest success. VC is a hit-driven business, and for every 1,000 companies that raise a seed round (itself an accomplishment!), there are only about 1% that make it to a unicorn valuation. VCs, therefore, need to be sure they have their hand in the cookie jar that ends up becoming valuable.

Having a marketing engine firing on all cylinders is thus key to (1) attracting inbound deals, and (2) convincing "hot" startups to choose your funding over others.

From the entrepreneur's perspective, giving away a portion of your company to a professional money manager means you want to know what they can offer in return. If you're selling a stake to a private equity firm, you generally just view the cash as fuel for an engine which is mostly running well. When hedge funds invest in a company, they are often buying shares from the publicly available float (company shares available for public consumption), so there's next-to-no expectation from the entrepreneur that this investor will be added. But if you're selling a stake to a VC firm, as Travis Kalanick did to give a huge percentage of Uber to Benchmark Capital in 2011 for $11 million, then you'd better be confident you're getting more than just money from these VCs.

Let's look at some basic numbers...

GGV Capital, for example, is a leading U.S.-China VC and has over $3B AUM, or assets under management. Their Twitter account has about 5,000 tweets. 500 Startups, which invested in Cadence, has about 1/10th the AUM but has tweeted over 20,000 times. Individual VCs are notoriously heavy Twitter users as well. Benedict Evans at the venerable Andreessen Horowitz has over 100,000 tweets.

By contrast, a PE firm I very much admire called First Reserve, has about $30B AUM and doesn't even have a Twitter account.

There's a simple explanation for this: supply and demand of deals. First Reserve is "the" go-to investor if you're an energy company trying to raise serious cash. Everyone in the industry knows it. For First Reserve to invest in marketing, it would need a motivation other than dealflow, i.e. the rate at which these firms receive business proposals. By contrast, there are hundreds of live deals for VCs, and a well-regarded brand can help a VC navigate such a crowded two-sided marketplace.

My own view is that such marketing efforts are best spent when they are educating the community.

GGV, for example, started a podcast series which features candid interviews with their investment professionals and portfolio company founders. Is it self-serving? Of course, but it adds to the community. When [redacted], a VC firm, rents out AT&T Park in San Francisco for "founders appreciation night", it's a not-so-subtle way of trying to pay for dealflow. I'm sure the ROI for the fund is there ("we met so-and-so at this event, and a year later, we invested in their company, which is now the star of Fund IV"), but it doesn't give back to the community.

One of the best stories I've ever seen in this space comes from an April Fool's Day prank by CB Insights in 2016. They put a fairly innocuous-at-first press release announcing they (as an information services provider) decided to become a VC, calling the fund ChubbyBrain Ventures. People bought it immediately. VCs emailed them to share dealflow. Founders emailed pitch decks. This despite such hints that it is a joke due to the fact that they are "actively recruiting investment professionals. We are looking for a diverse set of candidates from Harvard, Stanford or Wharton."

Here on LinkedIn, I highly recommend following Niko Bonatsos, who is a VC and has the occasional, self-effacing sarcastic post with the hashtag #vclogic. This guy gets it.

Let's hear from you all. Tell me about crazy or inspiring instances of VC marketing you've seen. And if you want to get a glimpse at the vocabulary used in the VC industry, tune into our webinar on Sep 20/21 where we'll talk about VCs and how they make money.