Traditional Late Stage VC is Being Disrupted. Here’s how.
Venture capital is experiencing a sea change. Consider just a few of the things we’ve witnessed in recent years:
- A 20x increase in the number of seed funds deploying capital in and around Silicon Valley since 2009. (I credit Ahoy Capital’s Chris Douvos for this stat.)
- Most legacy firms raising larger and larger funds with every fund cycle, with a few notable exceptions. This upward migration has caused many of these same Ivy League venture names to largely move away from Seed stage investing and, in some cases, even move away from what was traditionally considered “early stage venture investing.”
- The rise of fast-emerging ‘Tier 2’ tech ecosystems outside Silicon Valley that are catching up quickly with Silicon Valley and now challenging the Valley’s once-indisputable hegemony as the dominant ecosystem for tech innovation; and, finally,
- The flood of late stage investment capital and an influx of new investors, many of whom are recent arrivals to the asset class.
While each of the first 3 bullet points would individually merit an entire post to its examination (which I may explore in a forthcoming piece), it is this last point on which I want to focus. I believe mature and maturing tech companies will be funded in coming years in fundamentally different ways and from fundamentally different types of investors and investment products from what we’ve traditionally seen. With those changes, I believe we are seeing some structural and lasting changes in the late stage venture landscape and a possible winnowing of pure play late stage-only venture firms unable to adapt to new market realities. Allow me to lay out some of the elements to this argument…
1. The ‘arrival’ of debt
While private debt, in some form or fashion, has been around the venture ecosystem for decades we are undoubtedly seeing a renaissance in the perception of debt and its utility as a means to fund emerging growth companies. With this renaissance comes a long overdue re-appraisal of some of the less-than-favorable connotations about debt — some fair, many antiquated — that have traditionally soured venture investors and founders on debt as an funding option. There is also a newfound recognition…