I am always and often asked this question…. I thought I would finally share my feedback with you
Bottom Line: I strongly believe that:
- Traditional VCs will look more and more like full-stack professional services firms. Remember those dark ages when your early investors, late-stage investors, accelerator, PR firm, management training, and accounting staff were all provided by different firms? Not anymore! VCs will try to identify promising companies early and enroll them in end-to-end capital & support programs. Instead of “Uber, backed by such notable investors as Benchmark, First Round Capital, Menlo Ventures, etc….”, we’ll have “Uber — powered by KPCB”.
- “Truly Great” companies will find ways to sidestep the whole venture funding circus altogether. Given the repercussions of the points I made in the previous paragraph, the next generation’s Mark Zuckerberg will realize that signing up to be “powered by KPCB” is a sucker’s bet that will only dilute management and slow the company down (it would speed up the average startup, but slow down the very best). These founders will accumulate capital via their networks and raising capital from those individuals’ private largesse (i.e. not their formalized VC funds), and supplementing that capital with alternative funding sources (crowdfunding and so on), then only taking money from traditional VCs when their valuations are so high that the dilution is minimal.
- The Strong Will Get Stronger. Along with a few other VCs, Sequoia Capital will increasingly dominate venture capital. Institutional limited partners know Sequoia and the handful up there have one of the best, most consistent returns on capital, across all their funds. LP demand to invest in such funds will far outstrip supply until those groups raise more and larger VC funds.
- Mediocre Returns = Fail. VCs that cannot figure out a way to present themselves as being in the top 20% over any time period or category will suffer or shut down. If your VC emails prospective LPs to high five themselves about a 6x exit then they are probably playing small ball in a power law game and have zero startups with 10Kx returns.
- Increased Transparency. More and more limited partners will use data analysis to better select VCs to invest in. Many LP portfolio managers who do not use data and quantitative analysis will be moved to other jobs due to mediocre returns.
- Less Agency Risk. The days of VC general partners taking out LPs to box seats at Warriors games, etc. will come to an end, at least with respect to wining and dining LPs that manage money for public and possibly even private pensions, insurance companies and other widows and orphans. Why? Because of perceived conflicts. It’s just like muni bond firms donating to state and local officials. If it smells, it won’t last.
- Increased Liquidity. There’s no reason startup securities need to be so illiquid. Top institutional LPs complain about this pretty openly. So when the downturn happens, they will demand increased liquidity, transparency and accountability, as well as fees based on capital actually deployed and more sidecar deals. Why? Because some of this is already happening in private equity, where returns have been not good. Bottom line: good enough secondary markets will develop.
- Equity Crowdfunding Leads To Different Types Of VCs. Innovative VCs will come up with new models and types of VCs by experimenting and running cheap pilot tests by syndicating on equity crowdfunding sites like AngelList, FundersClub and Croedfunder.
- The Cycle Continues. The current froth will subside and overcorrect. Then there will be underinvestment in VC. VCs that engaged in managed paper up rounds and inflated valuations without exit will be taken out to the woodshed and shellacked. So will LP portfolio managers who actively invested in these obvious shenanigans. But other VCs will suffer too, as happens in an over correction to the downside. This will be followed by years of underinvestment and then an upswing leading to over valuation.
I’ve worked with counterparties during so many financial crises during my time on Wall Street, including Russian GKO, the Asian financial crisis, Long-Term Capital, Argentina, Brazil, etc. Markets are voting machines in the short term and highly emotional at times. There’s no reason to assume we’ll have a soft landing. Fairy tales happen in real life but not often. VCs should focus on generating for their investors good risk adjusted realized returns in the form of exits. With better data analysis and heightened scrutiny, LPs can make this happen.
Some further trends I see:
Increase in platform use and impact - Although they’ve been around for a few years, the true impact of platforms like AngelList is still in its nascent stages. As the platform is further built out to include features that drive compelling value add through data/network/etc., it will become a viable, if not preferred avenue for funding. And AngelList won’t be the only platform in the market. From what I’ve heard/seen, we are just scratching the surface on the liquidity that will flow through these platforms.
Shift in fee structures; the traditional 2/20 model works for maybe 10% of firms in the market. With the prevalence of non-management fee generating vehicles as mentioned in #1, firms will be finally forced to move performance based models. Admittedly, this is a far-off prediction, as it’ll take a number of events over a long period of time to occur broadly.
Content marketing becomes ubiquitous within venture. We’re already seeing this with firms like FRC, Redpoint, USV, Upfront, Foundry, and Homebrew. Related to this, we will continue to see the shift toward transparency in venture vs. opaqueness.
Proprietary technology platforms used by venture firms to not only cull deal flow, but used of all fund functions, including deal analytics, network management for portfolio and administrative functions. VC has long been considered an unscalable business; I think tech will change that.
Globalization of venture. Right now, venture is still fairly segmented by geography. As localized hubs become more sophisticated and efficient, venture will truly be a global play.
Emphasis on private liquidity. Illiquidity within the venture market remains a killer, and with companies staying private longer, is problem that gets worse. I think we’ll see more activity around private liquidity, not just for common shareholders, but private as well.
By :� Ziad K Abdelnour
Ziad is also the author of the best selling book� Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics (Wiley, 2011),
Mr. Ziad Abdelnour continues to be featured in hundreds of media channels and publications every year and is widely seen as one of the top business leaders by millions around the world.
He was also featured as one of the� 500 Most Influential CEOs in the World.