Despite serious societal challenges like Covid and ongoing supply chain disruptions, there is no doubt that Tech and Venture Capital are experiencing one of their best periods ever. While technology is advancing into more and more areas of human life, the means of investing in it (aka Venture Capital) has been evolving over time as well. In short, venture is changing.
In this article, we discuss how Venture Capital is changing from three angles:
1. Market Dynamics
2. The Changing Nature of VC Firms
3. Innovations in the Asset Class
1. Market Dynamics
The three major market dynamics that we are observing are the following:
Increasing Performance
Performance is driven mainly by the current state of the market, both in public equities as well as in late-stage ventures. The consequence is that more and more investors (both from direct and indirect sides) are attracted by the asset class and more money is becoming available.
From the LP side, it is not rare to see rapidly increasing multiples, even for early vintages. This is making our evaluation process as LPs more difficult for two reasons:
– It is difficult to say whether strong performance metrics are here to stay or not, if they are replicable in a different type of market and if they are due to a systematic approach.
– In a market where everyone is doing well, it is challenging to filter among opportunities, while the bar for successful investing is getting increasingly high.
Stronger Competition
As a result of higher interest in the asset class, more money flowing into the sector is generating more competition. Competitors are basically entering every corner of the ecosystem, from nano managers (see below under “The Changing Nature of VC Firms”) to family offices and hedge funds.
In order to win, players are focusing on three factors:
1. Value-Add
2. Pricing and more favourable terms (e.g. liquidity preference) for founders
3. Speed
Acceleration of Deployment
Stronger performance leads to more competition, which in turn leads to faster deployment. This is also due to the increasing quality and number of deal opportunities. Investment periods are becoming shorter (sometimes significantly so) and as a result, managers call capital way faster than before.
Despite the benefits of a more competitive market for the ecosystem (e.g. more transparency for founders), the speed of deployment cycles we are experiencing right now is not necessarily healthy, especially when managers sacrifice time to be spent on real due diligence just to win deals.
2. The Changing Nature of VC Firms
One important trend that we are observing concerns the evolving concept of what it means to be a VC firm. VC firms are changing, and they are not just investors in early-stage startups anymore. To explain the idea, here are three examples of how VC firms are mutating:
Venture Corporations
Larger firms are taking a holistic approach to investing and value-add, becoming way more than simple investors. The best example is a16z, who has been transforming itself into a “venture corporation” (as explained here by Dror Poleg).
Personal Brands & Nano Managers
Venture Capital is becoming more and more dominated by personalities rather than teams and firms. Founders want to work with this or that partner instead of this or that VC, while single GPs are flourishing.
In this context, nano funds – which are usually managed by a single person – are finding space in the market due to the personal brands of their managers.
Venture Building
As the market is becoming more and more competitive, pricing is going up and reaching ownership targets is increasingly difficult, VCs are gradually adopting venture building strategies (sometimes called “formation” stage investments). Basically, they work directly with founders to start new ideas from scratch, usually after a period of research.
3. Innovation in the Asset Class
A last interesting factor that we are observing in Venture Capital is how it is changed by innovations across three dynamics.
Forms of Financing
Beyond traditional equities, founders now have way more options to receive funding. Concepts such as revenue-based or profit-based-investing are gradually gaining ground.
In addition, financial service providers are becoming more familiar with startup risk, and are able to offer ad-hoc solutions. Apart from that, startups themselves (e.g. Pipe) are creating new financial products.
VC Structures
Aspiring managers now have new solutions to start their VC firms. In this perspective, AngelList syndicates have dramatically shaped the market and enabled angels to invest. Beyond that, we are also seeing more and more rolling funds and evergreen funds.
It is curious that new VC structures (syndicates, rolling funds and evergreen) are all connected to a single pain point for emerging managers: fundraising.
Access to the Asset Class
As the performance of venture is improving, there is also more demand to invest from non-institutional and more retail investors. Even if we are still in an early phase, venture capital is becoming more and more democratized, with platforms such as Moonfare or Revere providing new ways of access for investors.
We hope that sharing what we are seeing in the market can encourage managers to think about these dynamics and to adapt their strategies accordingly!
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Authors
About Danchun Chen
Danchun joined Blue Future Partners as an Analyst in 2020 as part of the research team. She is fascinated by the great impact of venture capital and tech startups on the future economy at a global scale. Before joining BFP, she spent time in Strategy Consulting, Startups and Venture Capital across China, France, Singapore, India and Switzerland.
Danchun holds a Master in Management from EDHEC Business School in France and a Bachelor of Arts from South China Normal University.
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About Marco Cesare Solinas
Marco is an Investment Professional at Blue Future Partners. He is passionate about Technology and Venture Capital and focuses on both direct and indirect investments. Previously, he has built an international and multicultural background across Italy, US, Germany, Turkey and Malaysia.
Marco holds a CEMS Master’s in International Management and a Bachelor´s in Economics and Finance from Bocconi University.
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