Last month, one of the Bay Area’s better-known early-stage venture capital firms, Uncork Capital, marked its 20th anniversary with a party in a renovated church in San Francisco’s SoMa neighborhood, where 420 guests showed up to help the firm to celebrate, trade tips, and share war stories.

There’s no question the venture scene has changed meaningfully since Uncork got its start. When firm founder Jeff Clavier launched the firm, he was mostly using his savings to write six-figure checks to founders. Now Clavier and his contemporaries, including Josh Kopelman of First Round Capital and Aydin Senkut of Felicis, collectively oversee billions of dollars in assets. Zooming out, the whole industry has gotten a whole lot bigger. In 2004, venture firms plugged roughly $20 billion into startups. In 2021, that amount reached a comparatively jaw-dropping $350 billion.

As the industry’s scale has changed, numerous rules of the road have changed, too — some for better, some for worse, and some because the original rules didn’t make a lot of sense in the first place. On the eve of Uncork’s anniversary, we talked with Clavier and his managing partner of many years, Andy McLoughlin, about some of those shifts.

At some point, it became completely acceptable for full-time VCs to publicly invest their own money in startups. Previously, institutions funding venture firms wanted partners to focus solely on investing for the firm. Do you recall when things changed?

JC: Firms typically have policies to let partners invest in things that aren’t competitive or that overlap with the firm’s strategy. Let’s say you have a friend who starts a company and needs cash; if ever the firm decides to invest in future rounds, then two things: there is a disclosure necessary to [the firm’s limited partner advisory committee] saying ‘FYI, I was an investor in this company, I’m not the lead, I did not price the deal, there is no funny business where I’m marking myself up here.’ Also, some firms may [force] you to sell investment into the round, so you don’t have a conflict of interest.

Okay then, when did it become acceptable to back competing companies? I realize this still isn’t widely accepted, but it’s more okay than it once was. I talked this week with an investor that has led later-stage deals in pretty direct HR competitors. Both companies say it’s fine, but I can’t help thinking there’s something wrong with this picture.

AM: They’re probably acting like it’s fine and they’ll continue to act that way until it’s not, and then it’s going to be a big problem. This is something we take very seriously. If we feel like there’s any potential conflict, we want to get ahead of it. We’ll typically say to our own portfolio company, ‘Hey, look, we’re looking at this thing. Do you see this as competitive?’ We actually had this come up this week. We think it’s actually [a] very different [type of company], but we wanted to go through the steps and make everybody feel very comfortable. 

Frankly, too, if we had a company going out to raise their Series A, I would never have them chat with a firm that has a competing investment. I just think the risk of information leakage is too great.

Maybe this particular situation speaks to how little control founders have right now. Maybe VCs can get away with backing competing investments right now, whereas at another moment in time, they couldn’t.

AM: There’s not a lot of late-stage deals getting done, so it could just be that the founder had to swallow it because the deal was too good to pass up. There are always so many dynamics at play, it’s hard to know what’s going on behind the scenes, but it’s the kind of thing that makes me personally very uncomfortable.

Another change centers on board seats, which were long viewed as a way to underscore a firm’s value – or investment – in a startup. But some VCs have become very vocal advocates of not taking them, arguing that investors can gain better visibility into companies in between the board meetings. 

JC: It’s your fiduciary duty to actually pay attention and help, so I find that statement ridiculous. I’m sorry. That is our job, to help companies. If you have a large stake in the business, it’s your job and your responsibility [to be active on the board].

AM: A bad board member can be a dead weight on the business. But we’ve been lucky enough to work with really amazing board members who joined at the Series A and B and C, and we just see the incredible impact they can have. For us, if we create a board at the seed stage, we’ll take the board seat if needed and we’ll be on through Series B and we’ll roll off at that point to give our seat to somebody else, because the value we can provide provide upfront from that  zero-to-one phase is very different from what a company needs when it’s going to $10 million to $50 million to $100 million [in annual revenue]. We like to still be in the room as an observer; we want to stay very close to the companies. But ultimately, in the same way as a CEO should be thinking about upgrading their exec team as the company matures, the same is true of the company board. For companies that need the guidance, board seats are still really important.

With the exit market somewhat stuck, are you finding you’re on boards longer, and does that limit your ability to get involved in other companies?

AM: It’s probably less to do with the exits and just more to do with later-stage rounds. If the companies aren’t raising Series Bs and Cs, then yeah, we’re gonna be on those boards for longer. It’s a consequence of the funding markets being what they are, but we are seeing things to begin to pick up again.

The other thing that happened was during the crazy times [of recent years], we’d find these late-stage crossover funds would be leading a Series B or maybe even a Series A, but they’d say, ‘Look, we don’t take board seats.’ So as the seed investor, we were having to stay on longer. Now that those same firms aren’t doing those deals and more traditional firms are backing Series A and B rounds, they’re taking those seats again.

Andy, we talked last summer, when there was still a lot of money sloshing around seed rounds. At the time, you predicted a contraction in 2024. Has that happened?

AM: There are still a lot of seed funds out there, but a lot of them are beginning to get toward the end of their fund’s cycle, and they’re going to be thinking about fundraising. I think the rude awakening that a lot [of them] are in for is the sources of capital that had been very willing to give them cash in 2021 or even 2022 – a lot of that has gone away. If you were raising primarily from high-net worth individuals – kind of non-institutional LPs – it’s just going to be really tough. So I do think the number of active seed funds in North America is going to go from, let’s call it 2,500 today, to 1,500. I bet we lose 1,000 over the next few years.

Even with the market booming?

AM: The market can be doing well, but what people aren’t seeing is a lot of liquidity, and even high net worths have a finite amount of cash that they can put to work. Until we start seeing real cash coming back – beyond the highlights here and there – it’s just going to be hard. 

How are you feeling about this AI wave and whether prices are rational?

JC: There’s a lot of overpricing happening, and [investing giant amounts] is not what we do at Uncork. A large seed round for us is like $5 million or $6 million. We could stretch ourselves to $10 million, but that would be the maximum. So everybody’s trying to figure out what is the investment that makes sense, and how thick of a layer of functionality and proprietary data do you have to avoid being crushed by the next generation of [large language model that OpenAI or another rival releases]. 

AM: People have been losing their minds around what AI means and almost forgetting that we’re ultimately still investing in businesses that, long term, need to be large and profitable. It’s easy to say, ‘Look, we’re gonna hedge this and maybe we can find a place to sell this business into,’ but honestly, a lot of enterprise AI budgets are still small. Companies are dipping their toe in the water. They might spend $100,000 here or there on a [proof of concept], but it’s very unclear today how much that they’re going to spend, so we have to look for businesses that we think can be durable.The fundamentals of the job that we’re doing haven’t changed.