Why Many VCs Are Now Heading Back Through The Revolving Door To Become Founders

By Matt Cohen

There’s a constant balance of power between founders and investors. The recent influx of capital into venture has created massive competition among VCs to get in on the hottest deals. This is spiking valuations and resulting in massive funding rounds, even at the earliest stages. Currently, the negotiating power is entirely in the hands of founders.

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However, it wasn’t always so. Before massive liquidity hit the system and capital was more scarce, venture investors controlled the leverage in conversations with founders. This ever-shifting balance of power has created a revolving door of founders turned investors and vice versa. The smartest entrepreneurs are wise to go where the power is.

Many of today’s leading venture funds were started and are led by former founders. The legendary Founders Fund was built by the PayPal mafia. Marc Andreessen’s Silicon Valley legacy is built on his role as a co-founder of Netscape. Likewise, most of the partners at Accel came through the revolving founder door. The list goes on.

While the jury is still out on whether or not being a founder leads to smarter VC deals, there are some obvious perks to having been on both sides of the fence. The most obvious is the inherent perspective these investors have on what founders want and need. VCs who have experienced the negotiating dynamics from the founder side are better equipped to leverage those dynamics to achieve smarter deals and better relationships with founders.

There’s also an undeniable respect that founders have for investors who have walked a mile in their shoes.

Additionally, one of the most important parts of being a venture capitalist is being deeply connected to the startup founder scene. Having that “one of us” street cred creates a genuine trust and respect in those circles that’s invaluable to gaining access to those communities.

Given the dynamics in the capital markets, many VCs are taking laps through the revolving door as well, leveraging their relationships and access to capital to launch new companies.

A couple of recent examples of this include David Sacks, the Craft Ventures investor turned founder of Callin and Keith Rabois, a Founders Fund general partner turned founder of OpenStore. Both started as VCs, became founders, then went on to launch amazing companies.

Notable VC and partner at Slow Ventures Sam Lessin recently switched sides to start his software company, The Fin Exploration, while calling “the end of VC as we know it” in a recent article in The Information.

The rush of institutional, traditionally public-market chasing capital has entered the private side—putting the squeeze on the relatively expensive, high-risk high-reward VC dollar. This is extremely favorable to founders, as the cost of capital gets driven down massively while the demand for startup equity skyrockets to new highs. There’s no doubt why Lessin chose to jump from VC to founder.

Investors turned founders have found success within the early-series rounds, where funding is booming and more SaaS startups are nailing down funding from outside of Silicon Valley, driving up valuations.

What is actually happening doesn’t mean Lessin is wrong. You go where the money is, and global funding isn’t getting shy around software startups. There’s a clear argument to be made that it makes sense to follow that money into a massive exit in order to provide the liquidity to capitalize on the eventual rotation of power away from founders and back to VCs.

Accumulating capital from the system through high-valuation exits seems to match the optimum timing to deploy that capital when valuations eventually come back down to earth.

Given the current dynamics in the capital markets, it makes sense to see more VCs start companies, exit handsomely, then redeploy that capital at reasonable prices over the coming decades.

This career rotation makes enormous amounts of sense over the 40- to 50-year career time frame, and I suspect we’ll see this revolving door growing in popularity as the current cycle continues to extend.

Matt Cohen, founder and managing partner at Ripple Ventures, was founding investor of Turnstyle Solutions, which was acquired by Yelp in 2017. He previously wrote about raising capital for Crunchbase News.

Illustration: Dom Guzman