Solo Capitalists Are Gaining on Traditional Venture Firms

The rise of the “solo capitalist” in venture has been an established trend for some time now. The term was coined by Nikhil Trivedi to describe individuals who:

• Are the sole general partner (GP) of a fund,
• Make unilateral investment decisions,
• Equate their personal brand to the brand of the fund, and
• Compete to lead rounds against traditional VC firms.
  

In recent years, solo capitalists have raised $100M+ funds and led rounds into unicorns like Playco, Notion, and TripActions.

Seeing these market changes, we decided to compare performance data for these solo GPs to that of traditional VC firms. AngelList has a unique look into how the investments of solo capitalists are performing, as we provide individuals the infrastructure to launch and manage venture funds and syndicates. In 2020 alone, funds and SPVs on the AngelList platform invested in 51% of all top-tier early-stage U.S. deals.

Here’s what we found.

Solo Capitalists vs. Venture Firms: Markups Over Baseline

To compare solo capitalists vs. venture firms, we looked at markups over baseline—the rate at which a certain set of deals has been marked up beyond what we would expect from a stage- and time-matched set of deals on the AngelList platform. It’s a timely measure of the recent level of outperformance of a venture portfolio (see the methodology section for more).

Markups over baseline is our preferred way to think about the performance of venture portfolios for two reasons:

• It reduces the effect of one-off huge winners, and so will reward GPs who make lots of marked up investments (“skillful”) as opposed to having a bad portfolio with a single high-returning investment (“lucky”). Our own research suggests the former is more replicable.
• It starts producing meaningful data faster than looking at returns, since investments start getting marked up in reasonable fractions about six months in and will generally be marked up at three years in if they ever will be. This is in contrast to a venture portfolio that may take six or more years to produce evidence on final performance.

The Results

We ranked the top 20 investors listed as an external co-investor on an AngelList platform deal by their markup rates over the platform baseline.

In 3Q21, we found that 7 of the top 20 external co-investors on the AngelList platform were solo capitalists, not venture firms. This is the most solo capitalists we’ve seen in the top 20 since we began tracking the top external co-investors in 2018. Solo capitalists’ share of what we define as “top” investors has grown considerably in a relatively short amount of time.

The solo capitalists who made our top 20 are:

• Elad Gil
• James Beshara
• Harry Stebbings
• Josh Buckley
• Lenny Rachitsky
• Jack Altman
• Naval Ravikant
  

What’s Happening?

There have always been solo capitalists in venture—but they've historically written small checks and focused on early-stage companies.

A number of circumstances have changed in recent years that seem to work in favor of solo capitalists.

Round Speed

Capital is being deployed at a record rate, and competition to get into rounds is high, meaning hot startups can fill rounds faster than ever (e.g., Poparazzi’s recent Series A, which closed “within days” of launching).

This tends to favor solo GPs because they don’t have to persuade other partners to invest and are often flexible with their allocation demands.

“Solo capitalists can weave through traffic like a motorcycle whereas these larger firms are like 18-wheelers,” said Beshara, who’s also the founder of the health beverage company Magic Mind. “I’ve found that founders love how simple, straightforward, and fast it is to deal with a solo GP as an investor, compared to a VC firm.”

Founder Experience

Founders like working with other founders—and all of the solo capitalists on our list are current or former founders. That shared experience means solo capitalists are often willing to accept more founder-friendly terms. Further, founders turned VCs tend to bring an LP network composed of other founders with potentially relevant experience.

“Compared to full-time investors, solo capitalists often create a lot more space for operator angels to co-invest alongside them,” said Rachitsky, who founded Localmind in 2010 (acquired by Airbnb) and co-manages the AirAngels syndicate. “And you know we’ll be working with you long-term, compared to a larger fund where you may get stuck with a more junior person day-to-day.”

As solo capitalists prove their value, they’re able to attract more LPs, raise larger funds, and cut bigger checks, creating a virtuous cycle.

“The value proposition is clearly resonating and solo capitalists are proving they’re useful to founders and valuable to LPs,” said Altman, founder of Lattice. “I think they can manage a lot more capital than people historically imagined, and deploy it effectively.”

Personal Brand

Many solo capitalists seeded their rise over the past few years by building personal brands through social media and other forms of content creation. Rachitsky writes a newsletter about product, growth, and startups that’s the #1 business newsletter on Substack (80k+ readers each week).

Stebbings hosts “20 Minute VC,” the world’s largest independent venture podcast, with over 100k listeners each week. He parlayed his influence as a podcast host into 20VC, a venture capital fund that recently raised $140M. By virtue of his media arm, Stebbings can help his portfolio companies get customers at scale, in a cost efficient way.

“If you have an investor on your cap table that brings thousands of people’s attention to your company, that’s a very attractive value proposition that few VCs in general partnerships actually have,” Stebbings said.

What Happens Next?

Where does it go from here? Can solo capitalists continue to operate alone as they raise increasingly larger funds? Will they begin to behave more like traditional VC firms, or compete with them to lead rounds?

Rachitsky says he’s already seeing some solo capitalists build out teams behind them while keeping their name and brand out front. “I'm guessing over time they'll start to look like existing funds, but positioned around 1-2 front-facing individuals,” he said.

While Stebbings hired a team to oversee the media and data arms of 20VC, he plans to keep the investment arm of his business small.

“My one single job is to put money into the best companies in the world, and to do that I need to remain nimble,” Stebbings said.

Beshara predicts a broader paradigm shift, whereby solo capitalists overtake large VC firms by aligning more with the incentives of investors.

“Large VC firms are incentivized by management fees and therefore AUM; solo capitalists are incentivized by carry. As the incentives play out, you’ll see more institutional money follow carry, leading to multi-billion dollar funds deployed by solo GPs,” said Beshara. “LPs will win, the best GPs will win, the best companies will get to focus more on making great products, and consumers will win from a more efficient ecosystem to bring innovation to the world. The only party that won’t win in this potential future, maybe a decade out, is the large VC firm structure that isn’t generating top-tier returns.”

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Methodology

An investment in a startup on AngelList is considered marked up if the company does a priced equity round in the future at a higher price per share than the initial investment.

As they mature, investments tend to have a higher rate of markups, and different investment rounds tend to be marked up differently (for instance, Series B investments on AngelList are marked up at a higher rate than pre-seed investments).

This means for any portfolio of investments made at any time in the past, we can calculate the expected number of marked-up investments in that portfolio. This expected number of marked-up investments can be considered a “baseline,” derived from the more than 18k investments on the AngelList platform.

The excess markup rate of a portfolio can then be defined by the level of outperformance of that portfolio: the rate above the baseline rate of markups.

The markup rates are stage-matched, meaning they’re compared to the average markup rate for the round they’re in and how long ago that investment was made (e.g., the average seed round markup rate of an AngelList platform investment made ten months ago that listed Harry Stebbings as a coinvestor vs. the average seed round markup rate after ten months from thousands of AngelList deals) to get an apples-to-apples comparison.

Please note that this metric only looks at external co-investors.

To be considered an external co-investor, it means another AngelList GP is listed as an investor on the deal. For this reason, it's very hard to be listed as an external co-investor as an AngelList GP.