Venture Capital investment into U.S. based companies hit $100 billion in 2018, and the industry is only getting bigger. But, we expect a lot to change.
Keep in mind that this post is the aggregated thoughts of 25 VC partners and my own. So, in line with the VC industry, I expect 5% of these predictions to be spot on and 95% to be wildly off.
Thank you again to all of the VCs that helped me put this together! Here are a few of their logos below, as well as 12 others who wished to remain anonymous.
There are four key areas I am going to discuss:
Shifting Fund Structures
The “2 and 20” model: In order to keep diversity in the profession, including socio-economic status, management fees will stick around for emerging managers and first-time funds. But, should a firm on their 12th fund be collecting $20 million a year in management fees? We are starting to see some innovation with Greylock’s economics being budget-based, not based off of a set fee. SOSV generates income from sponsorships and operations, so they have given rebates to their LPs, and some years they have not charged a fee.
Tokenization: VC is notorious for long lock-ups. The tokenization of funds and assets will reduce compliance and transactional costs and enhance fund liquidity. This means that founding teams won’t have to wait for a traditional M&A-style liquidity event. But, with liquidity will come volatility. This could lead to lower exit multiples on individual portfolio companies, but will also offer more non-zero outcomes for companies than the traditional model offers. Companies like Republic are using tokenization to give more investors access to deal flow.
GEN Y in the decision maker’s seat: This could lead to an increase in double bottom line funds, as the decision makers have different values in deploying capital. Impact and profit used to be separate, but we will see the two continue to blend. This could lead to different diligence processes and more impact studies being done.
Fund size: We will see more capital going to fewer funds as capital is increasingly becoming a commodity. Traditional Series A firms like Andreessen Horowitz and Sequoia will continue to get larger and play later stage in response to Softbank.
Investor landscape: Corporate VC involvement has gone from being present in 29% of deals in 2012 to 45% of deals in 2017. Strategic investors are typically not valuation sensitive, as we have seen the average deal value of corporate VC deals is ~3x the average deal value of all VC deals each year.
We are going to see increased participation from global investors as venture capital is in its early days around the world and is still becoming an asset class in many countries.
Other differentiated models: We will see more formalized social networks of entrepreneurs helping each other, especially on the education front. People know much more about how to start a company than they did 10 years ago through Youtube videos, Techcrunch and blogs. Village Capital has its entrepreneurs pick the start-ups in their class that continue to get funding. Revenue based financing could also start to gain more traction. Earnest Capital sets a return cap at a multiple of their initial investment (typically 3-5x) and gets there through a profit sharing agreement with the companies they invest in.
Technology Empowered VC
Computers are good at narrow intelligence. But, they are bad at general intelligence, as they can't tell you why they are doing what they are doing. Therefore, AI will help VCs, not completely replace them. AI will be used to evaluate the potential success of a founding team and idea at the earliest stage. Once the data proves to be valuable, it will be turned into a real forecasting model.
Some VC funds will create their own solution in house, including Peakspan and SignalFire. Others will purchase solutions from 3rd parties, which could be other VC firms selling their own (unlikely if it actually works) or start-ups that will pop up to attack the space.
Some of these solutions just aggregate simple growth triggers. For example, giving notifications when someone changes their role from Founder to Co-founder Linkedin. Other solutions are much more complex.
Generalist vs. Specialist VC: The top-decile funds will institutionalize into the best generalist funds. Later stage funds will act more as pure capital sources, taking less board seats and lessening their involvement. The overspecialization of VC funds was an interesting point of contention amongst the VCs I spoke with. Some believe that overspecialization is a product of having so much capital in the space that it is just a way to differentiate themselves between investors. Others and I think it is a product of more ex-operators starting funds and the fact that technology is now disrupting every industry.
Industries VCs are investing in: We surveyed over 100 VCs on this question. Here are a few industries VCs plan to deploy the most capital into from their next fund:
Other notable answers:
Expanding Silicon Valley Mindset
Silicon Valley will no longer be a geography, it is a mindset. California’s market share of VC investment is slowly shrinking, as is Silicon Valley’s. California maintains a dominant lead with over 51% of all of the early VC funding in the U.S. in 2017, which is down from 55% in 2016.
Market share of the U.S. will decrease as well. The share of what the U.S. represents relative to Global VC on a deal value dollar basis went from 81% in 2005 to 54% in 2017.
India, Latin America and Southeast Asia are the top emerging markets that will attract more capital. It will be exciting to watch places without legacy systems or infrastructure grow. Many emerging markets have skipped the PC and went straight to mobile, changing the mobile application development experience. The financial ecosystem will be notably different than the U.S. with the rise of mobile payments and banking the unbanked, like in China and India. And transportation and mobility will be upended, as they are re-inventing and transforming the public bus commute, and using drones and hyperloop logistical situations.
I am excited to see the effects AI, data and an increasingly global investor base will have on the venture industry. And, I am most interested in the changes in VC fund structure. VCs and LPs will challenge the standard 2 and 20 fee structure, tokenization will have major liquidity, timing and cost effects, and differentiated investing models will gain scale.
If you would like a downloadable copy of my summary presentation (which includes additional data and examples of VC funds and companies who are at the forefront of innovation), or if you have any questions about anything you have read, please email me at firstname.lastname@example.org.
I am a 25 year-old venture capitalist and amateur stand-up comedian living in NYC.