The New Generation of Venture Capital
Venture Capital firms are relying more and more on a single portfolio company to produce a Billion Dollar exit to generate most of the fund’s profitability. The logic is simple, invest into many companies with the hope that at least one will become an Unicorn (Over $1B valuation), or perhaps a Decacorn (Over $10B valuation).
The issue is that most traditional Venture Capital Firms are competing for a small supply of companies that can truly achieve such scale, most often with the motto of Go Big or Go Bust. The average exit is much smaller, mostly around 10 times the original investment, translating into unprofitable funds.
Traditional funds charge the 2–20 ratio, 2% for managing the capital and 20% of the profits later on. This creates a very comfortable zone for funds to raise as much capital as possible to collect 2% every year, without much pressure to provide real profitability.
Softbank recently announced a behemoth $100B Venture Capital Fund (yes, 100 Billion Dollars, not Million). If a traditional approach is taken, the Fund will have to fund dozens of future Decacorns, which is statistically unfeasible.
As a result of the limitations with Traditional Venture Capital, a new breed of funds sprung up in the last few years. The smaller funds require less Unicorns and more consistent growth, enabling startups that were unfundable to be funded. This opens up a very large opportunity market. Small companies with an established product, consistent revenue and consistent growth that could only access debt funding can now access Venture Capital.
The new generation of Venture Capital funds can also structure deals in much more flexible terms than traditional term sheets. One of our Partners at Outroll specializes in such deals, having structured over $3B in investments in his career. Structured Venture Capital reduces risk to our LP’s by marrying traditional equity with other performance and asset guarantees such as existing inventory, orders and sales.
The newly opened market enables Venture Capital Firms to access companies that are major economic drivers, as small and medium enterprises are responsible for the bulk economic output of developed nations. Said companies generally employ a handful of employees and can provide consistent growth over many decades.
Venture Capital firms can add a great deal of value to companies focusing on consistent growth. A new era is upon us, and Venture Capital will become a major economic driver in the years to come.