Venture’s chivalric myths
1. Key Themes
Theme: Venture's social norms, not law, govern behavior, and financialization is breaking that equilibrium
Pro rata is a social fiction enforced by reputation, not contract
"My view of pro rata has always been that it's a legal fiction because 'what are investors gonna do, sue you to invest in the business?' Turns out, yes!"
"Either way, we see how it's cultural / social norms and the expectation of playing again that keeps behavior in check, not law. We all have to engage in the fiction that it matters. But as ever, venture is an iterative game until all of a sudden it's not!"
Startups run on an extra-legal "chivalric" system of chits and norms
"So startups have developed this extra legal chivalric system of chits and norms to govern deal making. It's reminiscent of early modern European credit systems and gift culture, where contributions are recorded publicly as evidence of your good works and character."
"You never know when the person you might otherwise screw over or behave unethically in front of might be on the up or at least be in network with those who are. So everyone has to manage their reputation for the sake of long term profits, sometimes to the detriment of maximizing their short term P&L."
Financialization is turning a low-value, socially enforced right into a high-value, legally enforced one
"In Silicon Valley's chivalric culture the legal rights mean very little because no one would dare exercise them. In global capitalism's rules-based system, they mean everything."
"Historically pro rata was low value and socially enforced and financialization is making it real and legally enforced... It's a cottage industry no longer."
Theme: Pro rata is an option, and options have premiums, so structural terms are increasingly being priced
Pro rata rights are an option that is typically given away for free
"...obviously, pro rata is an option, and options have premiums. I would rather price the option and buy my equity naked, trusting my relationships to let me buy more."
Other option-like structures are now being priced at the top of the market
"Notably, we're starting to see the option get priced the other way with Thrive having a literal call option on OAI and SoftBank at one point effectively having a put."
Four structural drivers make the pro rata problem worse over time (via Hunter Walk)
"Seed funds have gotten big enough that they want/need to do their pro rata across multiple rounds"
"Outliers can be 10-100x bigger than last cycle, so a Series B or C is still a 20x+ bet in the best case"
"Hot secondaries and SPVs mean you can flip or fund pro rata you can't hold yourself, so it's 'a trade as much as an investment'"
"Rounds come faster, so more of them land inside a fund's initial investment period"
Theme: Healthcare AI automation is often zero- or negative-sum, so the opportunity is in positive-sum systemic redesign
Arms-race automation raises total system cost
"Most healthcare 'innovation' is zero-sum at best, negative-sum at worst... You automate getting through hoops so payers build new hoops. Both sides spend more on admin despite the 'efficiency.'"
"[BCBS estimated] an additional $1B in costs from AI medical coding alone"
Prior auth isn't even working as a quality filter
"in Medicare Advantage... only 11.5% of PA denials get appealed, but over 80% of those appeals win"
Replace the process rather than optimize it
"Otter obviates the need for PA by replacing it rather than trying to 'fix it' by engaging in the arms race with more tokens and intelligence."
"Lots of people have tried 'simplifying' or 'improving' prior auth but it's always been for a unilateral customer (the payer, the provider, the pharma company), so it just shifts surplus from one side to the other instead of reducing waste and spend."
2. Contrarian Perspectives
Preferred shares and contractual pro rata rights are overvalued relative to relationships and discounted common
- Rechtman's stance runs against standard venture practice, where preferred stock and pro rata rights are table stakes. He argues the downside protection and access rights are mispriced because founders don't value them symmetrically.
- Evidence/reasoning: Founders and VCs both only care about upside, so no one will trade price for terms.
"I'd happily buy common stock at a discount. And founders should be willing to sell it to me - less chance of them walking away with $0 in a mediocre outcome AND they'd increase their de facto control. The problem is that founders basically don't care about common vs pref."
"My operating assumption is that agreeing to these terms is useful for expectation setting around future negotiations, but if I'm relying on legal docs to secure my access, something has gone terribly wrong along the way / I have not done my job."
AI healthcare admin tools can make the whole system more expensive even while saving individual participants money
- This challenges the dominant narrative that AI automation is net efficiency-positive in healthcare.
- Evidence: PHTI and BCBS data.
"PHTI found that AI is cutting prior auth costs for individual payers and providers but not for the system, and risks making the whole process more activity-intensive rather than more efficient."
Prior authorization may be the wrong tool altogether, not merely a flawed one
- Counter to the consensus view that PA needs reform or better automation.
- Evidence: Most low-value care bypasses PA, and most denials that get appealed are overturned.
"over 60% of spending on low-value care (care the evidence says doesn't help patients) never goes through PA at all"
"At best PA is the wrong tool and at worst it's the enemy of an efficient healthcare system."
3. Companies Identified
- Description: Healthcare startup that replaces prior authorization with a shared payer/provider view of care decisions against clinical evidence.
- Why mentioned: Slow Ventures portfolio launch; a "positive-sum" healthcare play with $8M raised, co-led by Fika Ventures and Evidenced.
- Quotes:
"Otter gives payers and providers a shared, real-time view of care decisions against the clinical evidence, so a plan can remove PA and still see whether care stays appropriate."
"The long term opportunity here is to build FICO for healthcare: reputation and scoring that powers payments, transactions, and trust."
"Otter has shown it can keep decisions that go against clinical guidelines under 5% without PA."
Thrive Capital (Thrive)
- Description: Venture/growth investor.
- Why mentioned: Example of option pricing at the top of the market.
- Quote: "Thrive having a literal call option on OAI"
OpenAI (OAI)
- Description: AI lab.
- Why mentioned: Subject of Thrive's call option structure.
- Quote: "Thrive having a literal call option on OAI"
- Description: Global investment conglomerate.
- Why mentioned: Example of a put-like structure in a mega-round.
- Quote: "SoftBank at one point effectively having a put"
Fika Ventures and Evidenced
- Description: Venture investors.
- Why mentioned: Co-led Otter's $8M round.
- Quote: "launches today with $8M co-led by Fika Ventures and Evidenced"
BCBS (Blue Cross Blue Shield)
- Description: Major U.S. health insurer federation.
- Why mentioned: Source of data on AI coding cost increases.
- Quote: "BCBS estimated an additional $1B in costs from AI medical coding alone"
PHTI
- Description: Healthcare research organization (cited for AI/PA findings).
- Why mentioned: Evidence that AI isn't reducing system-level prior auth costs.
- Quote: "PHTI found that AI is cutting prior auth costs for individual payers and providers but not for the system"
Slow Ventures
- Description: Venture firm where the author is a partner.
- Why mentioned: Investor in Otter; author's fund (≈$325M).
- Quote: "I'm a partner at Slow Ventures, where I lead pre/seed rounds from a ≈$325M fund."
Fierce Healthcare
- Description: Healthcare trade publication.
- Why mentioned: Covered Otter's launch.
- Quote: "Read more in Fierce HC."
FICO
- Description: Credit scoring company.
- Why mentioned: Analogy for Otter's long-term vision.
- Quote: "The long term opportunity here is to build FICO for healthcare"
4. People Identified
- Description: Venture investor and writer.
- Why mentioned: Summarized why the pro rata problem will grow over time.
- Quote: "Hunter Walk summarized why this is a bigger problem than it's been in the past and why it's gonna be a bigger, not smaller problem over time"
Keith and Amol
- Description: Otter Health's repeat founders.
- Why mentioned: Founder-market fit was a precondition for investing.
- Quote: "Keith and Amol are repeat founders who've lived this problem. We wouldn't have backed it if they weren't who they are."
- Description: Author; partner at Slow Ventures leading pre/seed rounds.
- Why mentioned: Source of the thesis; invested in Otter.
- Quote: "I'm a generalist investor looking for weird takes on important stories: N-of-1 companies taking non-obvious approaches to markets that matter."
Elizabeth Holmes and Nathan Fielder
- Description: Subjects/creators of the film You Can See Everything.
- Why mentioned: The author is hosting a NYC screening.
- Quote: "a screening of You Can See Everything, the Elizabeth Holmes / Nathan Fielder movie in NYC."
5. Operating Insights
Don't rely on legal docs to secure investor access; invest in relationships
"if I'm relying on legal docs to secure my access, something has gone terribly wrong along the way / I have not done my job."
Takeaway: For investors, contractual pro rata is expectation-setting, not a substitute for founder trust. For founders, expect that sophisticated, financialized investors may enforce rights that were historically ignored.
Price the option instead of giving it away: consider buying "naked" equity at a lower price
"I'm happy to have no contractual pro rata rights and instead rely on how much you like me if you're willing to let me invest at a lower price... I would rather price the option and buy my equity naked, trusting my relationships to let me buy more."
Takeaway: Rights have economic value; trading them explicitly for price is a more honest negotiation, even if few counterparties will accept it.
Sell to both sides of a market by replacing a process, not by serving one side's arms race
"it's always been for a unilateral customer (the payer, the provider, the pharma company), so it just shifts surplus from one side to the other instead of reducing waste and spend."
Takeaway: In adversarial, multi-party markets (healthcare, payments), products that give both counterparties a shared source of truth can create positive-sum value, whereas one-sided automation tends to escalate counter-measures.
6. Overlooked Insights
The game-theory trigger for pro rata lawsuits is the collapse of reputational cost
"In either version of the story... the game suddenly became non iterative and the reputational costs went either way down or to zero."
The mechanism matters beyond this dispute: whenever a participant is already "blackballed" or on a last-chance exit, social enforcement fails. Founders and investors should assess counterparties' remaining reputational stake (and their own) when evaluating how binding informal commitments really are.
Healthcare's likely next substrate is reputation/scoring, not just transparency
"Once there's transparency and efficient transactions (already a huge opportunity) the payment substrate of healthcare can finally modernize."
The Otter thesis implies a data/scoring layer (a "FICO for healthcare") could eventually underpin how healthcare payments and trust are structured, a much larger market than prior auth tooling alone.