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The new hot job on Sand Hill? Being an ‘investment adviser.’

Protocol Pipeline

Hello and welcome to Pipeline. A special thank you to Owen and Tomio for filling in while I was away for longer than anticipated. It's good to be spending Saturday morning with you again. This week: CEOs should never do a rap battle, Sam Altman's largest investment ever, and why VCs are suddenly "investment advisers."

The new hot job on Sand Hill? Being an "investment adviser"

Last week's Sequoia news certainly shocked the venture capital world, but it wasn't the part about the evergreen fund that had investors calling their lawyers. For a variety of reasons, the giant rolling fund is likely to continue as a rare breed in the VC world. But Sequoia won't be alone in abandoning the (technical) title of venture capital fund and becoming a "registered investment adviser," or RIA.

Many top firms, including Andreessen Horowitz, General Catalyst and Battery Ventures, are now investment advisers, per SEC rules, and Sequoia's in the process of joining them. A16z may have been said to blow up the venture capital model when it converted to an RIA, but it wasn't unique at the time. Firms like Foundry Group and others have been RIAs for years. So what's the difference?

  • Venture capital funds had fought for and won a carve-out in SEC rules that allowed them to register as "exempt reporting advisers" or ERAs. This allowed venture funds to invest in startups and not deal with a bunch of compliance overhead.
  • One of the rules VC funds have to follow as ERAs was that non-qualifying investments — like investing in secondary offerings, crypto or other venture funds — had to be kept to less than 20% of the fund's assets.
  • Registered investment advisers don't have that cap, which is why you're seeing firms like a16z (which has tripled down on crypto) make the change.
  • Being an RIA, though, comes with a bunch of other strict rules, like having routine audits and regulations around advertising that make cheering for a particular startup publicly harder to do. VC Twitter, it was nice knowing you!

Making the switch should be based on how diversified a firm's strategy is. Battery Ventures switched in 2014 because the firm was taking controlling stakes in later-stage growth companies and also secondaries as part of its strategy, and it tipped the firm over the 20% threshold, said general partner Michael Brown.

  • "The pros are it does allow you more flexibility on the types of investments you can pursue — cryptocurrencies, secondary positions, buying majority stakes or even buying into public companies as well," Brown told me. "Depending on your strategy as a venture firm, it does give you more flexibility to make different types of investments as the market continues to evolve and mature."

It may give venture firms more investing flexibility, but it comes at a cost (literally). Brown warns that the compliance overhead is not something firms should underestimate. Even things like a partner's private stock transactions have to run through compliance.

  • Running an RIA is way more expensive. Compliance cost exempt VC funds a median of $50,000 a year during fiscal year 2016, according to an NVCA survey. Compliance for an RIA cost a median of $403,000.
  • "It is a bigger burden than I think people think," said Brown, who is also the NVCA chair this year.

The good news? Things could get easier for VC funds. The NVCA has been pushing for years to "modernize" what it means to be a venture capital firm. "The definition is not keeping up with realities of the industry," says NVCA's head of policy Justin Field.

  • The DEAL Act, introduced in the House this summer, would update the definition of a qualifying investment to include secondary transactions and allow venture funds to invest in other funds without counting against the 20% limit.

Venture funds may be more interested in exploring the path in light of the Sequoia news, but Brown isn't expecting every firm to make the switch overnight, especially if a policy change can release some of the pressure of secondaries. "I don't think there's any industry pressure to be a registered investment adviser," Brown said. "I think it comes down to individual firm strategy, and that's a decision, not an industry-wide trend."


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Zillow's flips became flops and Opendoor's stock cratered alongside it, but Opendoor co-founder and Founders Fund partner Keith Raboisdoesn't think the two should be compared: "Selling or shorting Opendoor due to Zillow's flaws is akin to shorting Google due to Yahoo's inability to monetize search well or return long tail queries properly."


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Inside track

People (and in particular the tech media) tend to obsess over billionaire founders like Elon Musk and Jeff Bezos and ignore the rest of the mega-wealthy. The glare of the social media limelight isn't fun, but with the attention comes the ability to tell their own stories and make real change in the world, points out Founders Fund's Mike Solana in "The Shitposting Gods of Silicon Valley."

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Five questions with … Headline's Mathias Schilling

Mathias Schilling is the co-founder and managing partner at Headline (formerly known as He's made investments in companies like Sonos, Gopuff, Farfetch and TheRealReal.

Pitch deck vs investment memo: What's your preference and why?

For me, it's Option C — it is all about the person telling the story. What is their vision, what motivates them, where do they want to be years from now? That energy is palpable and infectious, and it is the thing I'm immediately drawn to.

What was your first job, and what's a skill you still use from it?

At 16, I worked in the public relations department of NCR, and we launched a tablet, which was before its time and before consumers were ready for something like that. At the time, it was a product without a market, and I learned to never launch a product without an existing market.

What's one of the worst predictions you've ever made?

I've predicted that the market would crash since 2016.

What is the biggest issue that your partners are thinking/talking about at your Monday partner meeting?

Although my partners don't necessarily agree with me, the biggest issue I'm grappling with is that capitalism has shown to have far more problems than we previously understood, and we need to think deeply about how to best adapt to that.

What's one company that got away — and what you learned from passing on it?

In 1998, when I had first landed in California, I had a meeting with Larry Page and Sergey Brin before they raised their Series A. The CTO was a mutual friend of one of our portfolio company CEOs, Klaus Schauser.

At the time, search was so monopolized by the big players, and Google's go-to-market distribution strategy wasn't through consumers but through the enterprise, which we could have helped them with through our connection to Bertelsmann.

Their product was incredible, and I learned that you can break through any market share with a much better product.

Updated Nov. 6:This newsletter has been corrected to clarify that Sequoia is in the process of registering as an investment adviser.

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