No company, no . . . problem?

There are many reasons to think the traditional venture industry may be at a tipping point after a very good run. The most obvious indication are the sizzling returns private investors have made in recent years, while public shareholders haven’t fared so well. Consider data published yesterday by the WSJ, showing that venture-backed darlings to go public over the last 13 months, including DoorDash, Oscar, UiPath, Compass, Robinhood and Coupang, are respectively trading at -40%, -81%, -47%, -56%, -59% and -28% from their first-day closing prices.

Things aren’t looking so healthy at the other end of the spectrum, either. As TechCrunch noted last week, seed-, Series A- and Series B-stage companies, have been generating far less revenue in recent quarters than in years past. Likely, it’s because startups are raising money at a much faster clip (you can only make so much progress in a few months’ time!). But investors are also playing it looser than ever. No progress? No big deal, goes the apparent thinking. It’s the bet on the founder that matters.

Still, the strongest indicator that VC could maybe use a reset ties to VCs’ eagerness to fund people who’ve yet to even start a company. “It’s not a new trend,” says Niko Bonatsos, a managing director with General Catalyst. “But it’s becoming more visible now because of the massive rise of pre-seed and seed investing,” he continues. “There are a ton of general partners, bigger funds and more deals, and we’re all getting paid to invest the capital.”

Mark Suster of Upfront Ventures is doing it. “Let’s say we knew you at Riot Games, we knew you at Snapchat, we knew you at Facebook, we knew you when you were working at Stripe or PayPal,” Suster told us last fall. “We will back you at formation — at day zero.”

Ashu Garg, a managing director with Foundation Capital, shared what sounded like a similar strategy just last week. “Our goal is to have a handshake deal with someone as they’re ready to start the company. That’s the business that we’re in. There is no company. That is our business model.”

Ask many established venture firms and you’ll hear much the same.

Chris Farmer, who founded the venture firm SignalFire in 2013, was one of the earliest, and most public, advocates of “quantitative” venture investing. Back then, SignalFire’s platform, Beacon, was tracking more than half a trillion data points from two million data sources, from patents to academics publications to open source contributions to financial filings, in an effort to determine the comings and goings of engineering talent, among other things.

Farmer was the only one using that data as a marketing tool at the time, but many have since adopted similar, if less intensive, systems, including using public and private data to track down individuals who haven’t left work, or who’ve left work but haven’t announced any plans, or who’ve merely registered a company as a first step.

Some of it is absurdly easy. “Some of the data stuff, you can track for many years,” says Bonatsos. “If someone changes their bio on Twitter or LinkedIn, that’s a signal they are giving to people who are looking for that stuff, a way of saying, ‘I’m doing something new.'”

It has also become relatively effortless for bigger venture firms with a few analysts and some basic scripts to flag every company that might be of interest in states like California. “At least half a dozen of our major peers do the same thing,” says Bonatsos, “because when we email the founder, they’ll sometimes say, ‘Funny, a couple of others emailed me today.'”

Indeed, there are now many common ways for VCs to stalk talented individuals. Some are visible to VCs because they’ve raised money, built a company, then sold it. (VCs typically assume that either the outfit’s founders or their early employees will be thinking about launching another company soon.)

People with experience building enterprise products are particularly easy targets, thanks to code-sharing platforms like GitHub that enable voyeurs to see what projects are gaining traction with a broader developer community ahead of any commercial activity.

Even the rise of scout programs can be tied to the trend. Venture firms form relationships with operating execs and startup founders to improve their deal flow. But the expectation also exists that should these scouts launch their own startups, they’ll know who to call first.

The question begged, of course, is whether any of it makes much sense, and there isn’t enough data yet to know whether someone who is encouraged into starting a company can outperform someone who formed their business in a more organic way, say through an innovation, a particular insight — even spite.

Backed up by so much capital, VCs continue on with the strategy anyway.

For his part, Bonatsos has learned to consider certain questions when scouring for talent, including whether someone is still hungry if they’ve already sold a company or otherwise made a fortune. He tries to weigh whether someone’s thinking is “really contemporary or dated. Will they re-do stuff the way they did it before?” He also notes that “second timers can recruit, but it’s more expensive” for VCs to back whatever they eventually launch.

Farmer meanwhile also continues approaching would-be founders as early as possible, suggesting that it’s more necessary than ever given the frothy funding market.

As he explain it, “The cost of entry” for a startup that’s up and running is “200% higher over the last two years. So you either write a bigger check at a higher valuation to get ownership, or, if you’re contrarian, it makes more sense to take super early-stage risk because someone is willing to pay huge premium as [that investment] derisks over time.”

It’s simple math, he continues. “If you’re paying 3x the price for the same assets as three years ago, returns could be three times lower. If you are paying $20 million for an alumni from YC with very little track record, why not go earlier and find a founder even if their idea isn’t formed?”

It all sounds a little bananas, but it’s the “quantum of money being deployed” that’s “truly crazy,” Farmer observes. Either way, he suggests, SignalFire will live a lot longer investing its capital this way. “Where things are the most competitive is where there is some signal of traction and success,” he says.

“Then it’s a brutal knife fight.”