Talent & Capital: Why should you care about what a search agency has to say about VC?
Looking at recent rounds it’s hard to argue that there is more and more money in the market. Many investors are on the back foot when it comes to where they are distributing the capital they’ve raised (of which they have more and more). Different funds are dealing with this in different ways, but it’s undeniable that change is happening and it’s happening fast. I’m going to ramble a bit about a potential avenue these changes open up at the intersection of talent and capital.
There’s More $$ Than Good Deals.
As attractive deals are increasingly competitive, many traditionally series B+/Growth investors are placing money in earlier and earlier rounds – series A, seed, even pre-seed – to be able to participate (although letters start to mean relatively little here). This is true for big brand VCs who traditionally go early in later stage investing (e.g. Target Global) and players who have more experience in the seed phase like Index and Sequoia but who have recently raised larger and larger dedicated funds. The approach is sensible. However, pre-seed, seed/series A, and series B are very different. As you go earlier, you find yourself with less and less data and have to be more focused on assessing people rather than product-market fit, financials, and macro trends. The truth is that a solid team of entrepreneurs will pivot and iterate from seed to growth so many times that judging an opportunity by the product idea (alone) may not yield the best results.
It will take some time for this to show up systematically, but many of our VC clients have indicated that they are more and more willing to put their money to work at seed and pre-seed stages.
Investors <3 Data.
As more funds realise they need to keep up when it comes to storing, interpreting, and sourcing through data, some standard industry practices are also changing. When you think of ecosystems or hubs like Berlin, Amsterdam, or London – hot investment opportunities often have a sort of “R coefficient”, i.e. how many people are talking about your business in the ecosystem? Many VCs who are traditionally expert networkers rely on such dynamics to identify deals and companies. Sourcing through public/private signals, macro trends, and historical data creates a new dynamic where good deals can come from anywhere. The ability of ambitious start-ups coming from emerging tech hubs or marginalised geographies to get on the map for big hitter VCs becomes much more plausible. Algorithms have less bias when it comes to finding opportunities outside of a VC’s given network, so this model will lead to the emergence of new tech hubs, and investors putting money behind founders this way will find themselves with a more geographically diverse portfolio.
This requires a very different way of thinking from VCs who are typically much less data-driven (at least in general) than the companies they invest in. However, data also becomes commoditised, as multiple VCs invest in tech and entrepreneurs build products servicing a range of funds. This approach again will not allow most funds to get ahead of the curve.
Talent is King.
Now we’re getting to the point. As VCs and other tech investors tackle increasing amounts of threat and competition, many move to investing in people (pre-seed, seed) whom they may not know very well (new geographies). Additionally, with new technologies at the brink of global adoption (e.g. NFTs), VCs who want a piece of the pie have more difficulty relying on their natural network or backing repeat founders. To successfully adapt, VCs will need access to a new generation of founders and new assessment capabilities to determine whom to back. On the side of sourcing, you have operators, venture scouts, ecosystem teams (which are picking up across Europe by the way) and all of your usual suspects who help VCs with deal-flow; however, we typically talk about well-networked individuals here as opposed to finely tuned sourcing engines, and keeping these aligned with such a wide spread of geos is a full-time job in itself. Then there are firms that tackle talent topics for start-ups on a daily basis (yes, I’m talking about TBS and other tech-focused search firms).
They interview hundreds of technology executives week after week, develop excellent pattern recognition for what good looks like, and in many cases take a people-first, data-driven approach to assessing executives they work with. Additionally, they have daily touchpoints with senior candidates and often have unique access to information about future founders as well as contact with the best companies. They often have broader geographical coverage than their VC partners, as entering a new market for a search firm is much faster and easier in this business model (often fully digital and requiring just 1-2 executive searches touching certain geographies). Additionally, as VCs become more data-driven, there is a clash between data-driven sourcing, and gut feel-based due diligence. In later rounds, company performance data is available and reliable in forecasting future success; however, in pre-seed and seed rounds, there appears to be little data VCs can interpret. In fact, many investors rely on pattern recognition and gut feeling in identifying high-potential founders and executive teams. While many achieve success, these processes are by nature not scalable, because they require strong experience, well-honed skills and cannot be done without a human touch.
In reality, there are solid quantitative data to be understood here; however, the data are not gathered about the company, but about the people. Psychometrics – rigorous, data-driven and empirical assessment of candidates – becomes one of the single sources of valid and reliable data. Companies that are systematic at collecting and analysing personality data against company performance and assessing hundreds of founders have huge potential to build data-driven solutions to assess and build teams that are set up for success.
This creates a unique opportunity for companies like The Big Search among others to position themselves as close allies to capital.
For tech companies, as their rounds get bigger and pressure to grow increases, we see talent becoming the number one bottleneck for growth and expansion. Ask any founder today, you will see recruiting in the top 3 pain points of their businesses' growth. These businesses struggle with acquiring, developing, and retaining talent at scale. There is a tremendous amount of value creation to be had when these three actors converge and work more closely. The talent agencies have underutilised reach, sourcing capabilities, and expertise; the VCs have capital and access and need to continuously invest in value creation; the tech businesses need a more sophisticated approach to talent as they look to grow and win in the most competitive talent market Europe has ever seen.
There is a clear, untapped opportunity for talent agencies to play a much more significant role in the technology ecosystem globally. Investors who develop very good muscles and alliances around talent will have a clear value proposition for any company they look to invest in, and in turn they will be better positioned to identify/assess deals and even proactively approach potential founders about building companies.