The past decade has brought a lot of new investors to the playing field, myself included. I wanted to quickly jot down some of the trends I view to be catalysts and where the future may be moving towards. Not all are new as of 2020, but most are gaining steam.
1/ Venture Capital being cracked by new emerging managers who are breaking a once ‘club-access only’ field. It’s true to say that you no longer have to have gone to Harvard or Stanford, be a white male, and have wealthy parents (or someone in the family with strong connections) to begin a career. Of course, it’s obvious that still helps. But you can look at me. I went to a tier 2 university (Babson – go Beavers!), started in the military, and then worked my way through different roles where I ultimately landed a position that allows the deployment of an organization’s capital targeted towards in-organic growth. This can be said for many others over the past decade as well. Not only are there a lot of stellar emerging GPs coming up, but the advent of cheaper SaaS tools have aided in the growth, as well as communities on Slack where hundreds to thousands of like minded people aide each other in building up these skills.
1.1/ One recent statistic I heard is that 43% of VC investors are female, which is a drastic change from what it was in 2005, but when you look at the definition of ‘investors’, it’s up and down the totem pole (analyst +). There is still a lot of progress to accomplish before that statistic translates into one where 43% are GPs. And even more, work to get diversified founders the funding they equally deserve. But the nut is beginning to be cracked – I find it not only exciting to experience but also beneficial for the entire startup ecosystem.
2/ And this ecosystem is broadening. Being a Scout is one way to be an investor without working directly for a traditional VC fund. NFX runs a great site where you can create your own profile alongside hundreds of others in the field. Again, a traditional type of Scout would have been the ‘Sequoia’, where you’re a founder who’s given $1m of check writing ability. Your network and connections is what you’d leverage, and Sequoia gets in at a very early stage. As of 2020 moving into 2021, you can be someone who manages an accelerator, someone who’s a scout for Clearbanc (or others of similar focus), or a solo, multi-fund Scout that works for one of the larger funds wanting very early access in a space that’s not their bread and butter.
3/ Other avenues creating more ‘investors’ focus around the democratization of private share investing being powered by the likes of EquityZen, Forge, and as of recently CartaX. I can go purchase shares of a series D startup before the IPO, once something only accessible to wealthy individuals. Additionally, platforms like Rupublic (who also have Venture Partners & Fellows) allow traditional retail investor Reg CF opportunities. This is especially exciting as statistically some of the greatest returns originated over the past decade from early stage investments following the exits. I hope that we’ll see larger institutions and incumbents entering this space in the next few years as well. But similar to my BTC and ETH adoption hypothesis, I believe it’s necessary for an entrenched incumbent to dive in for broader market adoption. In my opinion, a billion dollar business line will be created if said incumbent can identify how (1) to mitigate risk to the retail investors, while (2) providing a duel-sided platform with (3) proper investment opportunities and liquidity on the backend. It’ll be a win, win, win.
4/ A few facets that are silently powering (or slowing it down) these trends of broadening access are that most of the largest financial returns over the past decade have been harvested in the private market, not the public market. It is a school of thought that’s gaining traction, but one that still doesn’t hold ground in all investing fields. This is a debatable theory, but when you dive into the data, seed, and Series A investors over the past decade who have built a diversified portfolio have seen some fantastic returns (just look here) that are driven by investments like this. Of course, you also have outliers that showcase how much of a game of statistics private company investing actually is (research power laws) when it comes to being a repeatedly successful investor.
5/ David Clark conducted some quick analysis against the theory of power laws recently. He noted that since 2010, 20,000 VC backed companies had completed exits amounting to around $3tn of exit value. In aggregate the top 25 companies each year accounted for $1.5tn of the exit value. And in percentage terms, he noted that translates into 52% of the exit value being driven by 1.3% of the companies invested in. This showcases the importance of how important it is to get into those 25 companies at an early stage.
6/ On the legal side, it is absolutely necessary that the SEC and others allow the ability to access through a risk-adjusted approach to mass markets over the next years. It’s no longer 1933 where access to information is the only privy on a principal-to-principal basis, or from a library. Being accredited has been one of the largest blockers to overcome when providing access. Companies like Angle.co are still out of reach given the need for accreditation. Yet is fantastic to see the broadening of that regulation this year. I hope it continues to be chipped away, re-modeled, and perhaps removed altogether if we can find a way to still protect investors.
7.1/ What I hope to see around 2025 for private company/ share investing is that one incumbent has acquired Carta or another, wrapped it in their architecture and templates while keeping the functionality, and provided access to the 20 million clients on their books. This would provide an entirely new suite of investable products that both offer strong financial returns as well as engagement excitement for investing again (think Robinhood but without the lawsuits and shady gamification). This product would be for individuals participating in HNW programs to those who have a few hundred dollars for their first trade. And if an incumbent doesn’t act, I have the full faith that someone (likely a name mentioned above) will succeed on their own, creating a new house-hold name competitor where the boardroom of that incumbent who didn’t act will say, ‘why did we not do this again?’ (Think of Ark’s rocket performance to date.)
7.2/ What I hope to see around 2025 for venture capital is the rise of solo-capitalists, scouts, and a larger number of emerging managers deploying their first raised fund (think of Mac @ Rarebreed). This will be an ecosystem where first-time founders in non-traditional cities and suburbs are closing checks from the scouts of tier-1 VC funds – through their scouts or co-investments, and a greater adoption through crowdfunding sites that have some wins under their belts. I would not be surprised if the profile of an investor isn’t one investing on behalf of two separate VCs, while they’re also writing their angle checks or one where they’re a corporate VC investor who are scouts for non-competing companies.