Saturday’s New York Times article titled “A Kink In Venture Capital’s Gold Chain” discussing early-stage investors Sevin Rosen’s decision not to raise another fund ignited a discussion on the state of venture capital investing.
Yawn.
The reasons why early-stage investors need to adapt and change are well understood and have been for some time. They’ve been discussed, months ago, at Disruptive Thoughts - check the archives.
Today’s interesting discussion centres around: (i) the innovations currently occurring in early-stage investing; and, (ii) what early-stage investing will look like in 5 years.
Currently there are plenty of intelligent investors conducting interesting experiments in early-stage investing (all with their respective positives/negatives) all attempting to find the right solution for bridging the early-stage equity gap:
Advisory Capitalists - in-kind investment of expertise, experience, social capital, … Advisory capitalists can add tremendous value to an early-stage investment but don’t typically provide one necessary thing: capital.
Microfund Managers - a scaled down traditional VC entity. An individual(s) raises a small fund and invests it in early-stage companies with the traditional VC structure: 2% mgt fee and 20% carry. In this model a VC is unable to invest a large in-kind investment (it can’t be justified with the payment structure / limitations of time).
Angel Syndicates - organized Angel groups that invest into early-stage companies. While attractive investment terms, access to valuable expertise, and necessary capital are all beneficial, the company may not get the full benefits of a VCs Keiretsu effect and the Angel investors often don’t get equity for their in-kind investment (other than fulfilling a desire to be back in “the game”)
Innovative VC Firms - we’ve discussed, at length, the benefits of such a structure at Disruptive Thoughts. The VC firm would have to evolve their fee structure somewhat, posing a challenge. The final form that the fee structure would take is still not well documented and the reaction of later-stage VCs to such a structure when investing is unknown.
Specialization Companies - that invest capital and in-kind services in exchange for equity and fill the early-stage company’s business stage/process pathways requirements. Again, the fee structure is not well documented and the challenges (legal/reaction from LPs/…) of raising a fund that fulfills large-sized early-stage investments in the context of a specialization company are real and significant.
I suspect that a few of these models will mature and evolve over the coming years and that a couple of varying “ideal” strategies for early-stage investing will prove to be winners in 5 years time. The reward for the group that finds the right model first will be real.
Anyone have any thoughts, articles, etc. on this stuff? I’m interested in hearing/reading them - I’m actively thinking about where early-stage investing is going.
It’s hard to make money analyzing what’s already understood (and the conversation is painfully boring). The excitement happens where people have “the clearest vision of something they’ve (n)ever had” and it seems like many are executing on their visions.
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