The space between VC and PE

Going to places that people say you shouldn't

An investing theme which has pervaded my thoughts for quite some time has been the inverse relationship between new sectors of growth (a graph going up) and the average size of business unit (a graph going down).

Yes, yes obviously power laws of investing are obviously not going away (as IPOs from Discord, SpaceX and Anthropic are about to make clear) but I remain intrigued by what’s happening elsewhere in the rest of the tail distribution. I tend to think of this as the space between VC and PE i.e. companies which are in a growth area but have the wrong business model for VC while also being too small for PE. The obvious reason to not go here as an investor is that you get all the downsides of both while having a somewhat capped upside. While we didn’t set up LFG Holdings (for Discord/UGC Gaming) and 10xHumans (AI Enablement) to ostensibly disprove that theory, it is precisely the space we play in. A surprising amount of alpha can come from creative thinking and collaborative building with founders.

Relatedly, as the guy who repeatedly got shushed at pre-2020 VC-backed board meetings for asking about exits and ‘who will buy this?’ type of questions, I am quite pleased to see the growing fascination by VCs with roll-ups (thank you to the 10+ people who sent me the latest Newcomer post). While kind of on the low-hanging-fruit side of creative business thinking, VC attention on a space remains a highly effective education method for newer founders. PE just doesn’t hype the way that VC can.

Speaking of the VCification of PE, a few weeks back I spent an afternoon hanging out with bootstrapped roll-up builders at the Rollup Europe conference in London. It was by far the most refreshing builder/investor gathering I’ve been to in years. The combination of energy and humility reminded me of pre-2010 SF meetups. As well as the classic search fund operators, It’s intriguing to see just how many former-VC-backed-founders are now in this space (either looking at vertical AI roll-ups or more traditional versions) and what drew them here. Talking to a few, some see it for the unit economics, others see it for the scaling leverage. Others describe it in terms of sanity.

It also made me feel quite bullish on Europe. Obviously on one hand, Dan Wang calls us a mausoleum for some reasonably solid economic reasons.

“Europeans have a sense of optimism only about the past, stuck in their mausoleum economy because they are too sniffy to embrace American or Chinese practice”

But on the other hand, seeing a new wave of founders going after Europe’s sleepy companies and transforming them makes me think about just how much upside potential there is. I feel like focusing on the place that everyone is running away from might be interesting.

Roblox

A lot of people pinged me about Roblox CEO Dave Baszucki’s interview on Hard Fork. To be clear, I don’t think all of Dave’s responses were great but as someone who has been deeper in both the technology and business of the kids space more than most, I have a few perspectives:

In an era where all the social platforms refused to acknowledge that kids really existed on the internet, Roblox was literally decades ahead by making young audiences the central consideration of what they were doing. That certainly doesn’t make them perfect but criticising the things they haven’t done (or done well enough) without calling out their investment into trust and safety is unfair. The internet would be a far less safe place for kids without a Roblox.

Critics of kids platforms frequently don’t understand that if you try and build the most restrictive environment possible, you will simply drive kids into adult platforms, which makes the situation worse. The genius of Roblox (and its contribution to society) is that they created an ecosystem which managed to appeal to younger audiences while having founder DNA which embraced the fact, as opposed to pretending it didn’t exist.

The internet was never built for kids. As time passes, this is gradually getting rectified but the solution is not as simple as bifurcating into ‘features off’ and ‘features on’. It has taken deep investment into technology by companies like SuperAwesome, Epic Games, Roblox, KID, Yoti and others to get there. We should absolutely criticise the deficiencies but it’s important to recognise the work that’s reducing the overall size of the dumpster fire.

I might write something longer over the holidays about this.

I tried to pay attention/But attention paid me (Lil’ Wayne)