Jul 9, 2021

Startups IPO. Why Not VCs?

By Keith Teare • Issue #264 • View online

The End of the Artisan VC?

Another Venture firm announced plans to become a publicly listed company this week. Nic Brisbourne’s Blackrock-backed Forward Partners is the fund in question. So, can VCs become publicly listed companies?

Contents

Editorial

It is a little early to call it a trend, and it seems to be primarily focused in London, but more VC firms are choosing to become public companies, following a trend that private equity has understood for quite a while. The latest is Nic Brisbourne’s Forward Partners, a UK-based seed-stage investor. They are following in the steps of Draper Espirit, which has been public for some time.

I am very self-interested here. I firmly believe that the venture model is going to be disrupted by a scalable, data-driven venture-tech approach and that a public listing-based asset class will be a big part of the disruption.

Why? It really comes down to the venture model and why a company structure with liquid stock is a better mousetrap.

Venture is a bit stuck in a 19th Century artisan model, and that is being kind. Superstar individuals are the unit of account looked at by LPs.

But, as stated in the Financial Times piece by Richard Waters

It’s time to stop talking about venture capital. It’s not that risk capital for new growth companies is on the wane — far from it.

Rather, the term, which conjures images of enterprising investors seeking out visionary young founders in their garages, fails to capture a powerful new reality.

Capital formation in the growth sectors of the digital economy has entered a new realm. Just about everything has changed: The nature of the capital that is fuelling growth in technology and digital markets, the suppliers of that capital, and the companies that are benefiting from this deluge of cash.

In short, a new private finance system has emerged from the old VC model, and a new and more diverse group of financiers has the whip hand over what has become an important engine for the future of business.

The extent of the transformation is clear from the latest half-yearly investment trends. The sheer scale of the private markets is one striking feature. The $139bn put to work in the first half in the US (sic, it was in the 2nd quarter) was nearly as much as the whole of last year, according to figures from CB Insights — and the 2020 figure was itself an annual record.

Great investors like those on Forbes Midas list do well as representatives of the artisan approach but are they the last of the dinosaurs?

With startup innovation becoming global and enormous, and with the three asset classes within venture becoming more clearly differentiated (seed, venture, and growth), the way to play the game is changing. The time is ripe to evolve how startups are funded and to significantly expand who gets to own their stock.

Forbes Midas List

Gené Teare in Crunchbase recently noted:

Global venture capital funding in the first half of 2021 shattered records as more than $288 billion was invested worldwide, … That’s up by just under $110 billion compared to the previous half-year record that was just set in the second half of 2020.

It is quite likely that venture will reach $500 bn invested this year.

But only qualified investors inside venture funds get access to the value created via these investments. There is no reason this has to remain true. Both the venture funds and the companies would benefit from a new model. But the main beneficiary would be regular people.

Let us dive into that statement.

Why would funds benefit? Today venture fund managers spend a long time raising capital, often years, Then they deploy the capital into illiquid startups, again over many years. Then some of their investments exit, a small percentage. Most stay private and illiquid for a long time and contribute to the “net asset value” or NAV of the fund.

The lengthy work and the lack of liquidity make the seed and venture asset classes very unattractive compared to more liquid approaches.

What if funds took their capital, at least in part, from a public company? LPs, as well as investing directly into fund managers, could invest in a public vehicle, that itself invested capital via fund managers.

Fund managers could raise capital quickly from the public entity. Net asset values would be reflected in the public market stock of the company, and be liquid. Every part of the ecosystem would benefit.

But even more significant would be the ability of Robinhood, E*Trade, and other investors to buy the stock of the public company and share in the innovation premium. It would transform innovation from only an artisan sport into a means of regular investors owning the companies that the artisans pick. Such a public company would offer investors access to the best private companies, acting like an ETF or Index fund might.

So, well done Nic Brisbourne. I hope to be able to do something big with venture tech and create a public vehicle to make this happen.