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Venture Capital 3.0 - Software and internet focused investing is not dead. It's barely started.

Venture Capital 3.0 - Software and internet focused investing is not dead. It's barely started.
By Keith Teare • Issue #268 • View online
Sam Lessin writes a really good piece on the end of venture capital as we know it. But it is not the end of venture capital as we know it. It’s the end of the second act. 3.0 coming up.

Sam Lessin is a clever man. I guess there is no news there. This week’s top story shows this in two ways. Firstly his headline is clever - predicting the end of venture capital as we know it is clearly a must-read. And secondly, his thesis is clever.
Now, firms that grew up around software and internet investing and consider themselves venture capitalists face a choice.
They can become just “capitalists” (drop the venture) and engage in direct and cutthroat competition with larger East Coast and global institutions to offer cheaper and cheaper capital. Or they can stick to their roots and move on from the increasingly tame world of software and internet investing to wild new horizons. (Think biotech, new parts of artificial intelligence and much more.)
Not completely right, however. Later stage money is industrializing what used to be called venture capital. In previous weeks we have spoken about Tiger Global, Coatue, SoftBank, and others. And Sam is right that the big money is coming and fast. He is also right that small venture firms will not be able to compete with the big money for speed, price, or size of the check.
But I believe Sam is wrong to associate this with the end of investment in software and the internet.
The net takeaway is that in the last several years, as software investing has gone from fringe to mainstream, enormous flows of global capital have been unlocked to finance software and the internet at increasingly competitive rates.
The real process underway (using the same set of facts) is the rise of the seed asset class and the growth asset class and the shrinkage of the traditional venture asset class.
Today there are over 3000 seed-stage funds in the world and over 350 in the Bay Area alone. These funds account for the lion’s share of investments in future unicorns. Their successes are quickly embraced by growth-stage investors. The companies that fail to make the grade either die or become “zombies”. There is a shrinking space where a venture fund can enter in the middle of this process and expect good returns.
Venture investing at the mid-stage is a dying art, but more capital than ever is flowing into software and internet companies early stage. This trend is a consequence of the shift to traction-based investing in the early to late 2010s. Once traction became a requirement of an A round most venture investors stood back until it was evident. This left a huge space in the early stage for new funds to emerge. Funds like SV Angel, Y Combinator, Plug and Play, Box Group, Funders Club, Founder Collective, Harrison Metal, Great Oaks, Boldstart, Seedcamp, Slow Ventures, FJ Labs, Soma, Lowercase, Tuesday, PointNine, LocalGlobe, Haystack, K9, and others are doing very well in the space previously occupied by venture investors. And it let companies get big enough for the growth investors to enter early. Leaving less and less space in the middle.
Alongside the rise of Tiger Global style investing, the rise of professional angels and seed-stage funds is the real big new trend, but that area of investing is now also subject to change.
This week we cover the announcement of Allocations:
a fintech startup building software to help smaller private equity funds form and operate, announced that it has raised a $4 million round at a $100 million valuation.
This is an attempt to marry seed-stage funds with crowdfunding, where special purpose vehicles (SPVs) pool capital from angels and others and seek investments into the best early-stage startups. The investors still need to be accredited.
My take? Seed-stage investing is the most interesting field for fintech innovation. Capital allocation at scale into the seed stage will produce returns that dwarf normal venture returns. In that sense Sam is right, venture is dead. But seed-stage investing in software and internet companies is not. Done right, this is where the lion’s share of future value will be created.
Sam’s options are to go big and try to compete with the growth players, and probably fail, or focus on niche areas where big capital is yet to play. Both are doable. But a better option is to figure out how to be in the best seed-stage startups in partnership with the new venture investors who play there.
More in this week’s video
Venture Capital 3.0
Venture Capital 3.0
Venture Capital 3.0
The End of Venture Capital as We Know It
Venture capital probably isn’t dead – TechCrunch
Innovative Venture Strategies
E43: Innovative venture strategies, Zymergen's implosion, Square acquires Afterpay & more
E43: Innovative venture strategies, Zymergen's implosion, Square acquires Afterpay & more
Allocations sees a world where myriad, smaller private equity funds are the norm
LPs make most of the money from VC funds. So who are they?
Companies Going Public in 2021: Visualizing IPO Valuations
Latin America’s Herd Of Unicorn Startups Multiplies
Apple crosses the privacy line
Apple says it will begin scanning iCloud Photos for child abuse images – TechCrunch
Where your news comes from
Ranked: America’s Most Searched and Visited News Sites by State
Internet 3.0
Jeff Morris Jr.
If they taught Web3 in school:

Art Class: Digital Assets
Computer Science: Solidity
Finance: DeFi
Law: Smart Contracts
Social Studies: DAOs
Accounting: Distributed Ledgers
History: David Chaum, ecash
PE: Top Shots, Zed Run, Sorare
Federal Reserve governor says private stablecoins are likely better than CBDCs
JPMorgan Starts Offering In-House Bitcoin Fund to Private Clients
Uruguay senator proposes bill to classify Bitcoin and other cryptos as ‘legal tender’
China Crisis
An in-depth look at the political motivations behind China's tech crackdown, as Xi pursues progressive authoritarianism at the expense of international capital (Bloomberg)
Policy and Cash
How Google quietly funds Europe’s leading tech policy institutes
Startup of the Week
A Good Story Always Wins-Robinhood’s IPO Pivot
Robinhood is now a stonk
Robinhood’s Dismal Opening Is a Telling Sign
Tweet of the Week
From 8 employees to 800 in under 2 years, we are so proud of what @johnnyboufarhat has built at @Hopin.

Congrats to the team on the $450m Series D raise at a $7.75b valuation 📈
Two-year-old events start-up Hopin boomed in the pandemic. Now it's a $7.75 billion business
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Keith Teare

That Was The Week is a editorialized and curated weekly look at developments in tech, startups and investing

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Keith Teare, Palo Alto, California