Tuesday, December 3, 2013

VCs : Adapt or get disrupted

Venture Capital industry makes its livelihood by investing in disruptors but the functioning of VCs have not changed much in decades. However, this is all about to change very soon.

Angel List is changing the way seed/early stage syndicates are formed. Google Ventures is changing the way Startups are spotted. 500 Startups is delocalising the industry. Corporate Venture arms are investing as early as Series A. Here are the 6 ways VCs need to adapt before its too late:

1. General Partner (GP) composition 
General Partners (GPs) have so far survived on being good generalists. But, entrepreneurs are getting more savvy. They are becoming more demanding. They are not just looking for money. They are looking for money + a platform, a network and a partner who can do business development for them. VC firms who invest in supplementing GPs with operating partners (for specialist assistance in growth hacking, hiring, business development, M&A, etc.) and in some cases, venture partners (for domain expertise) would attract more savvy founders. Obviously, this would mean a smaller pie of management fees but hopefully, a larger pie of carried interest based on better performance.

2. Delocalisation
Gone are days when aspiring entrepreneurs have to line up within 30 minutes driving distance of VC offices in Silicon Valley. New hot spots of innovation are emerging. With improvements in connectivity, it has become much easier to build a billion dollar Start-up (in some sectors) from Bangalore, Shanghai, Jakarta or Singapore. And, money follows opportunities. Sequoia is present in the US, India, China and Israel. Accel is present in the US, UK, India and China. And, they are not just investing in the countries they are present in but they are also syndicating with smaller funds around those regions. Some VCs might retain the criteria of investing locally within a certain travelling distance and end up having many more satelite offices as a result of that.

3. Data driven investing
This might sound a bit too geeky but it has been established that successful start-ups can be spotted better by applying data analytics techniques. Google Ventures claim to use some of those techniques. Firms like Angel List would have lot of clever data to predict the home runs of future. Savvy investors have successfully used algorithmic trading for gaining that unfair edge.

4. Increased spend (time and money) on Self branding and outreach 
Traditionally VCs have limited themselves to PR and marketing only when they invest in a Start-up or have had a successful exit. But things are changing for the good. They are now churning out blog posts, tweets, interviews, speeches, etc. Some are leading by making the ecosystem more transparent and providing thought leadership while others are quietly building sector and domain expertise. Some are even raking up air miles to speak at every possible opportunity anywhere in the world. 

5. Multiple stage funds 
Stage focus is going away. Investing in either seed or growth stage alone will be difficult. Micro VCs would find it difficult to survive because when Start-ups have a choice of raising money from someone who could do follow on funding versus someone who can't, they would choose the former. Also, growth stage VCs will find it hard to source deals. 

6. Syndication with Corporate Venture Capital firms
Corporate VCs are generally ignored because nobody likes Strategic investors at the early stages of a company. But I think they will become a much stronger force in the future. They are getting more aggressive and are even willing to invest at the seed stages.

What do you think? Anything you would like to add to the list?


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