VC is dead; long live VC
“The reports of my death have been greatly exaggerated.” — Mark Twain
This week I read several articles bemoaning the math behind venture capital funds (1, 2). Don’t worry — it’s not a new thing as just last month there were lots of articles about unicorns being “repriced” by the big mutual funds. One big institutional LP came out and said venture was their worst performing investment sector.
And yet… today I see this reference to research done by the good people at Stanford (heard it’s a pretty good school, right?)
I mean it’s easy to wonder how to reconcile the two things. Is it dead or dying? Or is VC one of the critical tools for our societal economic stability? Or is VC an easy target for click-bait “it doesn’t work” articles when such a small percent of sometimes dumb sounding companies get funded?
Here’s the thing: it’s all of those. Venture is not dead. In fact, it’s alive and well. But much like software is eating the world — transparency is eating startup investing. And frankly, it’s probably a good thing. Venture Capital and early innovation investing is super important to our economy. Hence why we want to figure out how to make it work (better).
If you look out at some of the firms that are thriving, they are embracing new approaches:
- A16Z.com → talks about the importance of helping fast growing companies hire
- First Round Capital → provides world-class educational materials for high growth founders and founding teams
- Data Collective → leveraging a network of data scientists to find the next innovations around data and data science
- Benchmark → staying incredibly lean/small when they have the opportunity to raise massive fund sizes
- 500 Startups → looking at smaller checks worldwide to widen its funnel
- USV → focusing in New York and leveraging the though leadership around blogging
There are obviously others, but those are just a few of the things that come to mind. And yes they are probably performing well — but the truth is we may not fully know their success for a decade as their funds mature.
Venture isn’t dead. Venture isn’t going anywhere.
BUT, what I do expect to emerge are newer types of fundraising vehicles for the emerging technology businesses that aren’t venture-able. No, most SaaS companies aren’t high growth venture businesses; most e-commerce sites shouldn’t raise venture; apps… well don’t get me started on apps.
We poke the “venture capital bear” when we think venture doesn’t work. Venture works and it works smashingly as a tool to accelerate high growth innovative companies. It doesn’t work in all cases and it isn’t something that is easy (hence why most firms don’t win). If it were easy, there’d be hedge funds setup to invest in private companies… As entrepreneurs, we need to keep building companies and know that venture is a fit for some of them, loans are a fit for others, revenue is a fit for some and ultimately the only thing that matters is we do out damnedest to stay in business long enough to figure out if we’ve got something awesome.
So, what does all this mean? Venture, like most industries, is evolving. The startup industry in general is relatively new as a “mass market” thing. New innovations are being tried and new will emerge throughout the sector. And that means more money is invested into companies that aren’t a fit for venture, or just fail for whatever reason. And LPs continue to want to find returns in this asset class. And at the same time innovations in funding models will evolve too. It won’t be “venture” but it’ll be funding technology-centric businesses where their assets are intangible as opposed to a restaurant or a doctor’s office. That’ll be where an emergent opportunity comes.
For the past year, I’ve been a managing director at NextGen Venture Partners, and our innovation is a network-driven thesis (think taking the venture partner model to scale with hundreds of part-time venture partners). The reality is we raised our fund on the message that “yes, there will continue to be outsized winners and those winners are critical for the country. Our model is going to find them better/smarter/faster.” Will we? Who knows… but we and our LPs know the numbers — and that’s why it’s important we try and evolve and win.
Long live venture!
