Capital is not a differentiator.

So where does that leave you, innovative financier?

In contrast to the lengthy dissertations you usually get from this newsletter, I wanted to try documenting a quick, pointed insight from my experience as an “innovative” investor.  It goes like this:

Capital is not a differentiator.

If you’re a GP of a fund, or an aspiring GP, don’t count on your “innovative finance” to get you anywhere.  

Yes, you are likely spotting a true opportunity in the capital markets.  Don’t doubt yourself.  Get that novel capital product out in the market.  

However, that insight is only going to get the interest you hope it will from fellow financiers.  It’s an academic insight.  An important one, but not one that will source great companies or raise your fund.  

If your capital insight is so great, there will be competition.  Before you know it, you will be competing on terms deal after deal.  Unless you aim to start a bank, that insight is only as novel as the capital market is nascent.  

Robust capital markets show us that capital products do not provide differentiation.  Imagine if a VC fund’s only claim was that they write checks in exchange for equity.  So does every other venture capital fund!  Banks offer the flip-side of this, often simply competing on the rates they can provide.  At the end of the day, it is capital, and capital is a commodity.

So what differentiation are you left with as a GP?

It should be the value you provide so that founders will want to work with you.  This should be how you open with founders and LPs (yes, LPs too).  Indie VC, Calm Fund, and Tinyseed, arguably the longest running “innovative financiers” outside of the impact investing space, all keep their novel investment structures in the background.  They focus on conveying their value to founders - their community, their ethos, their platforms, their playbooks, their programs. The structure they invest with is merely a function of the unique founders and insights they have accumulated through years of experience.  Great VCs deliver on the redundant claim of being the most value-add investor, and they get great dealflow and returns as a result.  The beginning of the flywheel is their value, not their term sheet (RIP Tiger Global).

If you stick the landing with your unique differentiator, the capital product you plan to offer will be a beautiful, menial detail.  

You’re the financier, founders will trust you to structure the deal appropriately.  They just want to work with YOU.

You’re the GP, LPs will trust you know how to invest in this awesome, unique community of founders you run amongst.  Without YOU, there is no community of badass founders to generate returns for them.

Focus on why you are uniquely qualified to find and support the founders around you.  Then, structure the deal in accordance with the economy you want to see.  

I promise this order of operations will pay off.  Hopefully, this finds some GPs at the right time in their fundraise. 

PS - If you ever do want to nerd out about capital products, this newsletter the safe space for that.