Venture Capital Redux
If you read business or investment literature (or even MIT Technology Review), you know that there are articles that appear with annoying regularity.
’10 Stocks to Buy Now’
‘What Makes a Leader?’
‘Managing Disruptive Change’
‘Advice from (insert name here), CEO’
‘Rebalancing Your Portfolio’
‘Ten Signs that You’re an Entrepreneur’
Another of these chestnuts is ‘The End of Venture Capital’. Go ahead, Google it, you’ll find articles dating back to the 90s. The topic really came into its own during the 2000 tech bubble, and had a massive boost in the aftermath of the 2007-08 crash.
And now, the ‘Rona, among other things has given new urgency to the discussion.
Okay, I admit that the beginning of this post is bit of a setup. One would expect the blogger to now talk about the stubborn resilience of venture’s business model, the naivete of business and investment ‘pros’ looking for hot topics and clickbait, and our collective appetite for disruption (for killing the Old Order and its rich and powerful in hopes of a system that favours people like us).
Here’s the pivot.
Traditional VC is changing, and faster than you might realize. Venture is a rapidly evolving species. Don’t be fooled by survivorship bias, mega deals, and lots of money. VC doesn’t look like – or invest like – it did in the 1980s. And it’s going to look a lot different in the coming years.
Why? Venture is awash in money. Which is part of the problem.
When I came to Ireland, I had to learn a lot of new words, phrases, meanings. ‘Grand’ in Ireland doesn’t mean ‘grand’ stateside. Same for hot press, and nobody over there knows anything about punnets, yokes, or being on the lash. My favorite Irish phrase: fit for purpose. A lovely term, perfectly fit for purpose.
VCs funds are increasingly not fit for purpose, and the trend showing lower fund returns in the last five years is good, hard evidence. Why? Here are some thoughts:
- More competition. The marketplace is increasingly international, and with more bidders chasing the same number of deals, prices have risen. Not good for returns.
- Information is democratized. It’s harder to keep tabs on an increasingly international market, or on a secret breakthrough technology. Smart investors have to work harder – and journey farther afield – to find gems. And if that wasn’t bad enough, AI is now building portfolios with comparable VC returns without ever suffering through a pitch or meeting an entrepreneur!!!!!
- Payouts are increasingly concentrated, and missing one can be fatal. If you’re in on a whale, good for you. But in a market with lots more players, it’s not as likely that you’ll have your harpoon in the next Moby Dick.
- Deals take longer than the lifespan of a fund. To get at the best deals, funds are having to do something they abandoned decades ago – invest early, sometimes even in pre-revenue deals, a territory where even angel investors tread with caution. And the funds have to circle more funds, provide more support, hang on for the long haul, not just wait until the big deals are teed up for a late round.
- And finally, greater diversity in the market. Traditional limited partners – family monies, sovereign wealth funds, pension funds, corporations – are bypassing funds and their management fees and investing directly in startups. Not to mention money from ICOs (more on them in another post), debt financiers, special investment entities (like SoftBank’s Vision Fund), and a bunch of others.
The bottom line for Irish startups? Here are a few of my own thoughts:
Venture will become increasingly internationalised, but also increasingly regional in character. We are likely to see more non-Irish money (lodged in Ireland and managed by people on the ground here) being invested by people who will benefit from local, even personal interactions with companies.
And venture will be investing in deals at earlier stages. They’ll be looking to invest through three or four rounds, really grow companies – and grow Irish economic value.
And we might even see funds that look more like growth funds that do not have a ten-year lifespan. Funds that allow investors to select the deals they favor (instead of the portfolio approach of the standard VC model). Funds that provide long-term capital appreciation, look more like Berkshire Hathaway than Kleiner Perkins.
For Ireland, the change is coming. Stateside VCs now reach out to me asking for regular updates on the deals I’m seeing. And I’m meeting more and more ‘scouts’ hired by stateside VCs who are paid to burrow in and support companies prior to investing (Galway is still a bit far afield, which might be an advantage in the long run).
Will VC fund returns improve? Increased competition and democratized information both suggest that the answer is no. The market IS efficient. But VC may once again play a significant role in providing smart money and long-term support to early-stage companies. And wouldn’t that be a welcome change in the market!!!!
Educator (Associate Professor) / Entrepreneur / Leader of angel
communities /Entrepreneur in residence at PorterShed
and BioExcel Rarosenberg@gmail.com