How Will Software eat Venture Capital? Some Thoughts

After I released my post “How Will Software Eat Venture Capital”, a couple people told me they felt annoyed after reading it because they expected, instead of a job posting, something like, well, an answer to the question. :-)

So: here are some rough & evolving thoughts.

How Will Software Eat Venture Capital?

I’ll separate it into 3 buckets: software for founders, software for VCs, and software for LPs.

1) Software for Founders

Fundraising:

On the company fund-raising side, it’s still hard for early-stage founders to do the following:

— Identify the best investors
— Get in touch with them (either directly or through shared connection who can warm intro…)
— Assess an investor’s reputation
— Assess founder-investor fit
— Get comps (how investors compare with each other, especially their terms)

There’s lots of room for software to help here. Angel List, Gust, NFX signal and others have repositories of investors and have taken crucial steps forward in the realm of investor discovery, but it’s still hard to get a list of the 20 best investors you should pitch based on what you do, your sector, stage, etc, or even more fuzzy characteristics like “types of founders I’d be a perfect fit for” Because there’s a lack of public information about this, we rely on who is top of mind, which is why so many VC’s are tweeting all the time…

Ideally there would be some matching mechanism that knows what I like to invest, at what prices, and what I look for in founders and companies, and introduces me to founders that meet that criteria.

Social Capital’s CAAS is also an inspiring experiment in the realm of democratizing fundraising and making the fundraising process more accessible to underrepresented founders. [Idea: Perhaps something similar could exist for discovering underrepresented investors / emerging managers? As I wrote here, I’m surprised fantasy VC isn’t yet a thing.]

In an ideal world, founders to be able to access relevant and interested investors without middlemen bartering introductions. Some platforms have tried to be this, and, in the case of Angel List, have had moderate success, but they are often just another portal to a human screener.

2) Software for VCs

Sourcing:

Companies such as AL, Mattermark, Crunchbase, CB Insights, and Pitchbook (and Product Hunt!) have proven that there is enough data to surface some % of startups launching every year, however, there’s opportunity for software to look for startups before they launch…by indexing people instead of companies — identify all the founders who are most likely to start something in the next year (e.g. Acquired founders hitting 2 year marks, talented employees hitting 4 year vests, etc)

Also, since most deals are done via referrals, software should help optimize firm’s existing networks. I hear First Round does a tremendous job of this, and a large percentage of their companies come from referrals that were empowered by their internal software.

In terms of existing tools that help leverage networks, I must say that Affinity’s platform is quite compelling and we at Village get a lot of value out of it.

Diligence:

Firms like Correlation have used technology to augment or even automate parts of their investing process. But, since there’s so little data at early stages, I’m dubious about software’s ability to help here beyond sourcing for relevant characteristics.

3) Software for LPs:

This seems like an under explored area.

LPs have very limited information into how GPs are actually performing — what deals they’re seeing (and not seeing), what deals they’re winning (or losing), etc, whether their investing out of conviction (or following others), etc.

Today LPs look at things like follow-on investors, which is a lagging indicator of deal flow quality. That’s better than waiting for realized returns, but is still pretty limited of a signal.

Software could help LPs plug into GP deal flow CRM to better assess GP deal flow and investment process. This will allow LPs to better develop conviction early around emerging managers, which is super important because there is such limited information that LPs effectively have to commit to 2 funds to evaluate if this is a long term fit. Software can streamline that process, allowing LPs to potentially decide after fund 1 if they should continue.

***

I’m not sure any of the ideas here is a huge stand-alone business* (Ask Pitchbook or Mattermark: VCs are not great customers), but the ideas above can definitely differentiate a VC firm in a crowded market.

*= Affinity may be a counterargument, or the “exception that proves the rule”

I’d love to hear other thoughts on how software will transform venture capital. :-)