“This is the year the tortoise may gain on the hare.”
There are a lot of data points that one can observer to get a sense of the venture capital markets – both LP fundings into venture and VC financings of startups. They point to some widely known facts: financings & valuations are up massively over the past 7 years and non-VC money has entered the system.
But these data points are often lagging indicators and perhaps a better barometer of the future would be to gather data on VC perceptions in the market right now. Of course sentiment can swing wildly with new information but I set out to take the pulse of the market as we enter 2016.
[note: to follow realtime conversations & engage with me on Facebook you can follow me here: https://www.facebook.com/msuster ]
State of the Market
The full presentation & data can be downloaded on SlideShare.
Let’s start with some basic data most people know. Limited Partners (LPs) who invest in VC funds have continued to pour money into venture – with the market returning to pre-recession levels.
Don’t be fooled by the slight dip in 2015 – the size of funds & timing of deals in market in any year can skew the data set. My conversations with LPs tell me that 2016 is one of their business calendars in years and unless we see an unexpected, sudden downturn expect the market size in 2016 to remain at current levels or increase.
How do I know? We surveyed 73 LP firms to get their views on the market. While the data from LPs makes it clear that they have concerns about the pace by which VC firms will invest, 82% said they expected to keep the same pace, which 8% suggested they would increase investments.
5 years ago I sat at our annual meeting bored beyond belief. It wasn’t just that I have ADD making boring meetings excruciatingly painful – it was that the format was tired, unimaginative, uninspiring and not very useful. We did what many VC funds did – we presented our annual results, we stood up and talked about our portfolio companies, we invited a few to also present and then we had dinner & drinks at some posh restaurant.
I have been evangelizing to founders for years to be more thoughtful about how startups update investors and run board meetings so I would be pretty hypocritical if I wasn’t willing to try and be more effective myself.
So I decided to change up our format a bit. Here’s a short sample of what we now do.
In the VC insider baseball world a discussion has gone on about “VC platforms” over the past 5 or so years. While firms define platforms differently, let’s just say they are the services that a VC offers outside of investment capital and partner time on boards or providing intros.
Examples of VC platform services include: recruiting, marketing, design support, inside sales reps, consulting, accounting services and so forth. Each VC has their own take on which services to provide and mostly they’re free but some smaller VCs charge portfolio companies for use of these services but usually at a cheap cost.
[Side Note: Upfront has hired Kerry Bennett as a member of our executive management team to run marketing – please follow her on Twitter here]
Platform services aren’t a new concept – in the late 90s a new breed of firms emerged who provided services that hadn’t typically been offered. The two most prominent – Internet Capital Group (ICG) and CMGi – raised the bar for others and every firm in the Valley seemed to have a new war for services.
I’m often asked about the differences between being at a VC and being an entrepreneur and whether I prefer one or the other.
The biggest difference I cite is that Venture Capital often feels like an “individual sport” while startups are a “team sport.” The reason is that at a VC you have a group of partners who often have different focus areas of excellence, each pursues deals in their respective field, each makes investments and sits on boards and each spends their most difficult hours tackling problems at portfolio companies vs. solving the challenges at the VC itself. You come together as a team one day per week (the “Partner Meeting,” which for most firms is on Mondays) and mostly share the news & information from your portfolio companies or evaluate new deals.
Startups are team sports because you’re all working on the same shared objective of the company. Startups often have mission statements, goals & objectives and the best roll out company wide processes to align the CEO’s goals with the executive management goals with the next level staff goals all the way down the organization. The top-line results are shared because every member of the org ought to be contributing to the same goal.
There is a lot of uncertainty about the state of the private, high-growth technology markets and the venture capital markets that underpin them. On the one hand innovation is clearly at an all time high unleashed by smart phones, fast telecom networks, social networks that spread commerce and the fact that we are all one click away from buying things on Amazon, Apple, Google or PayPal.
In 2012 I penned an article called “It’s Morning in VC” that highlighted many of these trends and in 2014 I published a series of data in this VC SlideShare presentation of “Why VC is Much More Compelling” now, which updated many of our earlier analysis.
Fast forward 3 years and looking out into the 2016 horizon, what do I see? Perhaps I would call it “Mourning in VC” as in mourning for the days of rational behavior.
One of the least understood parts of the venture capital industry and venture capital firms is how investment decisions actually get made. The truth is that each firm is different and there isn’t one standard but over the years I’ve talked with enough of my peers to get sense of how many firms work.
Often if it’s a bigger firm (say 4 partners or more) and it’s a super small investment for their fund size (let’s say $250-500k when they normally invest $5-7 million) they will just require 1 or 2 partners to decide. For anything that would be considered a normal investment for the partnership most firms try to make sure every partner has seen the deal and has a chance to weigh in. That’s why the investment process begins with a partner meeting and if they really believe in your business then they “champion you” by inviting you to a full partner meeting.
What happens next feels like a black box to outsiders. They only know if they get a yes, no or “I need to do more work” after that process. Some firms have formal voting structures but in my experience most don’t.