Stage specialist VC firms might lose to behemoths like Sequoia

  • A war is brewing between behemoth VC firms like Sequoia and smaller firms that primarily invest in seed and early-stage startups.
  • Nikhil Basu Trivedi, the former managing director of Shasta Ventures, a boutique VC firm focused on early-stage investments, wrote a post on Substack that described these behemoths as “agglomerators.”
  • Firms like Sequoia and Accel are seeking out higher returns and more ownership over their portfolio companies, which could pose an existential threat to the collaborative nature of the VC-funding ecosystem.
  • Stage specialist firms are fighting back by funding seed and early-stage startups more quickly, while “agglomerators” are writing fatter checks at higher valuations. 
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The venture capital business is designed to identify the startups that will thrive and those that will perish.

Now the VC industry itself may undergo a similar survival of the fittest contest, as two of the most popular breeds of VC firms to emerge in recent years fight for the same deals.

Nikhil Basu Trivedi, the former managing director of Shasta Ventures, a boutique VC firm focused on early-stage investments, lays out the situation in a recent edition of his newsletter, “next big thing.” In Trivedi’s view, the VC landscape is now dominated by two distinct business models: “agglomerators” and specialists.  

Colossal VC firms like Sequoia Capital and Accel epitomize the aggolomerators, investing in startups at multiple stages and across practically every sector and geography, with fund sizes exceeding $1 billion and billions under management.

These behemoths have no problem writing large, attractive checks at sky-high valuations, and their business models make it difficult for them to collaborate with other VC firms on deals.

“They need as much ownership as possible to generate the highest returns, and they can get that ownership by investing in companies at every stage,” Trivdei writes. “Most of the agglomerators are therefore zero-sum players in the ecosystem.”

For the smaller, specialist firms that focus on funding seed and early-stage startups, this poses an existential threat, according to Trivedi. As the agglomerators continue to expand their reach, he writes, budding startups may be inclined to forgo working with seed-focused firms, which tend to offer less money. 

“This may not be in the best interest of founders”

The implications of a VC turf war could be significant, and not just for venture firms.

In many cases, startups receive funding from multiple sources, which helps them to expand their networks and connect with industry experts. But as agglomerators continue to expand their wealth and their reach, it may become more difficult for startups to collaborate with multiple funds.

“This may not be in the best interest of founders, who can benefit from working with multiple firms,” Trivedi writes.

Plus, seed-focused funds and stage specialists can provide insights to founders that are tailored to their specific investment stage, Trivedi writes. Agglomerators, with investments in seed-stage as well as early-stage and growth-stage products, have other priorities. 

But the success of the agglomerators is no sure thing. The rise and fall of SoftBank’s $100 billion VisionFund shows that size and money don’t guarantee success — especially if the money is being pumped into questionable businesses with dysfunctional management.

And for some smaller VC firms, the best path to survival may ultimately be evolution.

The stage specialist funds that end up generating the highest returns, raising the most capital, developing standout products, and attracting more LP dollars may very well seek to topple the current behemoths and crown themselves the new agglomerators. 

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