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What changes can we expect in VC over the next 5-10 years?

X

The public market has seen some amazing changes over the past 15-20 years, specifically when it comes to private vs. public companies. Companies are tending to stay private longer out of desire. Going public is less attractive because it's expensive and more difficult than staying private, which has allowed private markets (VC, Angels, etc.) to find success in investing with private companies over public ones. What big changes might we experience over the next 5-10 years, similar to the ones mentioned above?

10 Replies

Melissa Skehan
1
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Melissa Skehan Advisor
Passionate, Mission Driven, Strategy, Growth & Impact Leader - Founder, CEO, President, Executive Management
If VCs don't see a ready pipeline of exits (ie IPOs - often themost profitable exit for early investors), will the VC market continue to expand or do we return to more of a private equity model? I believe the VC market will remain strong, but also know that VCs need to see their formula for big returns. They still seem rather enamored by the "unicorns". Look forward to the discussion...
Peter Kestenbaum
2
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Peter Kestenbaum Entrepreneur
Advisor, Investor, Mentor to Emerging firms
1. The VC model, without going into too much detail, is one based on management fees, carry etc which in the end means that the minimum viable VC fund is really around 100M... albeit you do see some circa 2000-2010 funds a bit smaller. Kind of like anything else there is a baseine cost in feeding some minimal salary to GPs, your receptionist, meeting legal fees (both for firms and the partnership filings ) and expenses to research and solicit new firms... you need a few mil per year to do that and at 2% mgt fee thats 100M-- higher mgt fees are not competitive with other investments...

2. In the olden days (circa 1990-95) it took a few million dollar investment to start and cultivate an emerging company.. You had to pay for your SUN servers, an office, an office receptionist, your monthly oracle license, a crack in house sys admin to keep your mail system humming, desktops for everyone.. Today its 50 bucks a month for cloud services, no charge open source tools/databases, no office costs, minimal equipment cost, and your office space ranges from open public spaces in hotel lobbies to a few hundred bucks a month in WeWorks... or to be blunt 100-200K to get a start up off the ground is very real. I need 50 or 100K and commit for another 100-300K to be off and running not a commit of 2M with a promise of another few mil if I meet objectives unless I need hardware prototypes...
I can build the next SAP for 100K ( I might need more to take it to market.... see discussion below)

3. The VCs challenge... We have to invest 100M... That use to be 20-30 firms at 2 to 5M each... Firms do not need 2M to start so we are stuck.... we can

a. invest in more firms at less dollars.. but that means more good investments have to exist and we can find them plus we need to find a way to keep board presence and management presence/oversight in 50 or 100 firms with just a few general.. partners... a tall order

b, figure out how to compete with angels and super angels who easily play in the 100K-500K funding startup space

c, wait for follow in rounds when that firm does need $1-5M to roll out... I know how to do that am good at it but later round investments are lower risk meaning less reward for my LPs.

Plus as you mentioned Melissa the VCs have to deal with LPs who quite frankly no longer see the generic upside... sure there are many unicorn stories but LPs are smart and know that barring a lucky hit they are now looking at 5 to 10% returns not 20% or more with a time frame that is not less than 5 years but probably closer to 10...

At least where I stand in my little world the private equity model, angel networks etc are going to win the battle...

pk
Patrick Hidalgo
2
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Patrick Hidalgo Entrepreneur • Advisor
Financial industry executive who is now writing software.
I think the big reason that companies are not going public because there is so much M&A activity. Public companies are using cheap borrowing rates to buy back their stock at a record pace. This helps drive their stock price up and makes it cheaper to use it as collateral to buyout other companies. Since borrowing is so cheap, the could also just borrow to make their acquisitions as well, but since compensation is tied to stock price, the former is more favorable.

When interest rates eventually go back up, it will make this activity much more expensive and more startups will probably go back to the IPO route.
Axel Schultze
0
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Axel Schultze Entrepreneur
Founder Society3 Accelerator & Fundraising market place
Interesting question, Megan.
there are quite some conversations around the future of VCs - at least here in Silicon Valley - but also currently in Europe. I watch the space for many years and see an interesting trend when we look back in time.

Before the 60's most entrepreneurs got institutional funding through banks. But as banks grew larger and risk management become much more complicated, Banks removed themselves from startup funding.

VC's stepped in and unfold their full potential in the 80's. With it way more startups got funded and the seed funding level became smaller and smaller. In part due to lower cost of developing products (except medical and bio space)

In the early 90's Angels stepped in as VCs - like banks before - moved upscale. Since around 2005 most VCs prefer to step in at Series-A and no longer invest in seed rounds. Angels unfolded their full potential and again way more startups got funded beginning around 2010 - actually more than twice as many on an annual base. The trend continues and as some VCs syndicate in the multiple 100 million$ rounds it appears that VCs are slowly leaving even the A-Round space. Obviously there are plenty today but it may further change in the next 5-10 years as your question concerned that time span.

The number of individual investors will continue to raise. With the new SEC rules A+ and Title IV also the investment infrastructure is shifting. Governments around the world want to get more investment funneled into startups. Angel groups and Fundraising Platforms are aggregation mechanisms for seed rounds all the way to Series A, B or C and even the so called "Mini-IPO" as introduced by SEC Chair White just recently.

In 10 years from now VCs will be much bigger than today and many will be out like the banks in the 40's to 60's. Angel groups and fundraising platforms will take over an important role to funnel capital from millions of investors into millions of startups around the world.


Ming Tsui
0
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Ming Tsui Entrepreneur
HabitatForAll.org
My take:

If we have start up failures of high rates now, what will happen when
minimum wages go up even much higher by 2018-2020?

I would say VC firms will be very cautious putting their money into
start ups. I think they will probably put in less money to minimize the risks.

If they do put in more on certain start ups with high potential growth,
valuation of those firms will be pushed extreme high valuations.

I got a feeling maybe there will be less new businesses in the future
and huge corporations will have dominant power and staying power.
Barrier of new business entry will be so huge that most people just
can even imagine why they would start up a new venture to compete
as there is no more competitive level at all. Example of Samsung and
Intel, there is no way to compete as they both control the whole manufacturing
of chips. Besides the cost to open a fab will go up much higher as well.

Even if you have better technology idea, on profit wise competition still
can't make any head way against those giants.
Patrick Hidalgo
1
0
Patrick Hidalgo Entrepreneur • Advisor
Financial industry executive who is now writing software.
@Axel,

Good points and graphic. I am not sure what it is like in other countries, but until the regulatory paperwork for non-accredited investors is changed in the US, I don't think that that space will be utilized very much outside of Kickstarter and Indigogo. Those are great platforms to help build prototypes and product testing without giving up ownership.

The trend of super angels creating their own syndicates and charging management fee and carry will probably be a trend that lasts for a while. They have sort of taken over where VCs used to be. As this trend matures, maybe they will fill the $5 - $15MM funding range that VCs are vacating.
Patty DeDominic
0
0
Patty DeDominic Advisor
Chief Catalyst, Managing Partner at DeDominic & Associates (Also Chief Catalyst for Maui Mastermind and Exec Coach)
innestors are looking for more than MVP they want proven concepts w/scaleable cash flow. Innovations in life sciences are just around the corner, providing health care for millions. You can listen to two great interviews I did with Debi Coleman ( apple fame & a VC) on www.topbankingcoach.com what do VC want?
Axel Schultze
0
0
Axel Schultze Entrepreneur
Founder Society3 Accelerator & Fundraising market place
@Patrick - thanks for the comments. Much to say but I try to make it short :)

* With US JOBS Act Title IV in effect since last week, non-accredited investors can actually invest now in those Title-IV based offerings.

* However I see the real deal coming in when we get liquidity into the startup securities. We had a platform in Germany that had a transaction part so that investors could Exit Anytime. It was a huge advantage - but in the gray zone. We are doing this in the US now officially also based on Title IV and hope we can do that for Title II deals as well any soon. That would open doors - well flood gates - for the 90+% accredited investors to invest also in that risk class.

* I'm afraid you are right that syndicates step into the former VC role with carry and management fees. We see that already on angel list. Honestly I think the management fee is a really bad idea. It killed the hunters instinct to a certain degree and even less good companies got funded as the funds needed to be spent. Most fund managers would love to see a 0% MM fee and would accept an even larger carry. That may be much easier possible with angels and super angels.

I wonder how you see this evolving - looks like its still open.
.
Patrick Hidalgo
0
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Patrick Hidalgo Entrepreneur • Advisor
Financial industry executive who is now writing software.
@Axel,

My guess is that just like the hedge fund world, there will be some separation of syndicates into a few big ones and lots of little ones. Little and big here could be volume based in addition to series size or funding amount. The larger ones could still command higher management fee and carry while the race to lower both will be among the smaller ones. There will probably a lot more segmentation branding among the smaller ones as well. All in all, a pretty exiting time for everyone involved.
Patty DeDominic
0
0
Patty DeDominic Advisor
Chief Catalyst, Managing Partner at DeDominic & Associates (Also Chief Catalyst for Maui Mastermind and Exec Coach)
Re the changes in VC: I ASKED a VC "What keeps you up at night?" and for other advice for those bringing on Angels and investors. Listen to my great interview with Debi Coleman of Apple fame and Smart Forest Ventures. She helped Steve Jobs in the very early decades and then went on to take a company public and invested in many others. We added two excellent interviews with her to this site: www.topbankingcoach.com If you would like to weigh in on this subject I would be happy to interview you too. Please post your thoughts and we can find your credentials here too.

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