As 2016 begins and 2015 ends, I wanted to jot down a few thoughts about where VCs have been over the last year and the questions that might be answered over the next year.
Why? Is the abandonment born from a redistribution of resource allocation or risk reduction? Many mention signaling risk as a major factor. Is signaling really a reflection of the entrepreneur or the investor? If the investor invests at seed and the company does not meet expectations, the obvious thought is to think the company has underperformed. But has the investor underperformed as well? In a sense, she has been so wildly off-base as to not even trust her past self – Quite the conundrum for the next LP meeting.
As multi-stage firms move farther up the chain, will the seed stage market experience increased efficiency or will the influx of capital dissociate valuations relative to the later stage venture capital market?
As opportunities abound, capital is plentiful and cost to launch dramatically reduced, it’s logical to assume the sheer number of compelling opportunities at the seed stage has to increase. The time allocation necessary to diligence companies at the granular level might not be feasible for a true multi-stage firm. The portion of their total capital invested at the seed level may not justify the time or resources needed for that level of diligence. As a result, the multistage funds have conceded the space to micros, angels, and funding platforms. This is a significant shift.
It’s incumbent upon seed stage investors to commit fully to their portfolio companies and understand the challenges facing them by virtue of their stage. I think the migration upwards indicates that multi-stage firms are aware of the commitment these seed stage companies will need in the coming years, which will be leaner and more competitive, but with even larger potential rewards hanging in the balance. They seem to recognize there is an entire sub-industry emerging to fill this need and for the time being their resources are better allocated farther upstream.
The New, New Thing: Startups as Strategic VCs
Multi-stage firms are beginning the process of doubling down on their successful bets by way of committing capital to funds managed by startups within their own portfolios (most recently the Slack Fund). If risk means “more things can happen than will happen”, these funds are undeniably reducing their risk. They are allocating a portion of their capital within relatively controlled environments where other participating partners are aligned to continue funding ideas that experience success within that framework. It’s odd in that by contributing to these funds, sizably by all accounts, these firms are reducing their ability to fund companies that might rival or exceed the startup whose value/userbase has no growth to necessitate their own fund. Traditional VCs are creating in-house strategic/corporate arms inside of their own portfolios. This is not to suggest acquisitions and acquihire haven’t been a part of the venture landscape for quite some time, but that the clarity of intention and mandate speaks to fundamental shift in the way traditional VCs are filtering the seed environment.
The Data Imperative
In addition to the explosion of seed stage companies and seed stage investors, there’s a commensurate explosion in data collection around and within the venture ecosystem. Mattermark, CBInsights, Pitchbook et al are no longer quaint venture-backed experiments crawling and crunching disambiguated data that’s altogether incomplete, but have now become essential tools for any serious VC. Their role in risk reduction going forward is difficult to overstate.
From CBInsights ‘Mosaic’ score, to the rise of quant-driven VC, data – and by extension machine intelligence, will begin to play an increasingly integral role in the venture capital investment process. As the market’s velocity increases and as the secondary market emerges from the shadows, we’re not far out from a more liquid venture capital environment, one that more closely reflects the public markets.
What will be most interesting is how the general public becomes a participant in this market as it develops.
I’ll be tracking developments in the following sub-verticals in the New Year:
-AI developments within the language-translation space
-The Disruption of Insurance
-Contextual Credit Facilities
-The Re-Invention of Search
-The Re-Emergence of UI/UX designer as Rock Star
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