Predicting the Future of Venture Capital

You know what’s weird? Day by day, nothing seems to change, but pretty soon…everything’s different.

New Money, Old Money, and Funny Money

In Part IV, we covered new sources of capital, the pump from low interest rates, and how the number of new investors has recently increased dramatically. We see this expansion continuing, with new investment from corporates, foreign wealth, public market investors, and even governments. Institutional sources of capital that typically focus on fund investing continue to make more direct investments into companies at the later stages and will do so as long as they see return and the time to liquidity stays high.

NVCA/Pitchbook Data

Old Dogs Learn New Tricks

With new investors and more capital, there’s increased pressure to innovate and stay competitive. Why would a founder spend months pitching VCs for a seed investment if she could simply do an ICO/STO, raising more money in less time giving up less control and getting earlier liquidity? Why would management of a pre-IPO company raise a growth round from an established late-stage VC if they can raise more money at a higher valuation from a sovereign wealth fund or SoftBank’s $100 billion Vision Fund?

New Sources of Liquidity

An influx of capital and investment models across all stages of venture means more companies have more chances to succeed. As a result, more companies should succeed. Early data as compiled by Eric Feng seems to suggest just that: returns haven’t yet gone down despite a tripling of investment. But as we mentioned above, unless public markets and acquirers are similarly bullish, the combination of regulatory overhead and readily available capital at the late stages will keep companies private longer. As a result, they will feel pressure to provide liquidity to early investors and employees.

The Future is a Full, Liquid Stack of Niches

And now some predictions. The trends of more investors, more capital, new strategies, and more liquidity lead us to these conclusions:

1. Venture will be more liquid and democratized.

A constant increase in information symmetry and connectedness will also allow investors and companies to be more organized and aware of the ecosystems they are operating within. More competition will finally erase mythical seasonality and increase startup formation. Crypto has brought 24/7 tradability of assets, and with other platforms, unprecedented liquidity. Other less radical solutions will continue to grow until companies and investors adopt security tokens en masse. Indexes of security tokens will also be created, allowing you to invest in US-based healthcare startups as an index without investing in a venture fund.

2. Venture will grow increasingly unpredictable and localized, functioning like niche public markets.

A more robust and liquid market that is still based on localized information and largely driven by localized “hands-on” investors will be even more prone to hype cycles. In observing the industry and speaking with investors, we foresee smaller and more rapid microcosms of the phenomena so expertly described by Jerry Neumann in his blog post entitled Heat Death, where investors quickly pile into a segment (or geography), driving valuations up, only to be mostly disappointed, quickly leaving behind what may actually be a promising segment for more patient longer-term focused investors and entrepreneurs.

3. Incumbents will create more volatility than in past cycles.

As we study our own economy more thoroughly and such information becomes more intertwined with the building and maintenance of businesses, core concepts found in the “Innovator’s Dilemma” and “value investing” begin to favor incumbents. This is actually a source of market stability on a macro level, but increases volatility for entrepreneurs and investors seeking to challenge incumbents.

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Neil Devani

Neil Devani

Investing in and supporting change.