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Venture Capital Is Changing ....Again

Venture Capital Is Changing ....Again
By Keith Teare • Issue #256 • View online
Back in the day, Venture Capital was simple. Raise a fund, pick the best startups and invest in the A round, follow on at the B and C, when revenue gets to a certain point (a variable) go and do an IPO, possibly preceded by a mezzanine round. Exit and go again. Not any more.

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Editorial
A more personal editorial this week.
Back in the day, Venture Capital was simple. Raise a fund, pick the best startups and invest in the A round, follow on at the B and C, when revenue gets to a certain point (a variable) go and do an IPO, possibly preceded by a mezzanine round. Exit and go again. Not any more.
There was one type of entity at the time, a venture capital fund. And startups had one place to go, Sandhill Road in Menlo Park, California.
I did it myself, more than once.
But in 2021 there is a far more complex board that the game of venture is played on, and it is evolving all of the time. To really grasp it you have to go back to the year 2000 and the 5 years following. The bubble burst in early 2000. The one size fits all venture capital ecosystem imploded and stopped investing almost instantly.
Known as the “nuclear winter” among insiders, this period lasted until 2005. At that point, as web 2.0 began to take shape, several trends were born. These include incubators and accelerators, super angels, and Micro VC funds.
By 2007 all three of these were well established. Y Combinator was founded in 2005 by Paul GrahamJessica LivingstonTrevor Blackwell, and Robert Tappan Morris. Ron Conway and SV Angel became very active in that period. Jeff Clavier formed his first fund - SoftTech VC (now UnCork) in 2004 and was actively investing. TechCrunch was born in 2005.
Roll the clock forward to today and Crunchbase numbers over 1250 Micro VC funds, over 900 Accelerators or Incubators, and over 8000 Angels that have made investments in the last 2 years.
Today there are three distinct asset classes in venture. The seed, the venture, and the growth asset class. And the landscape of funding now embraces a sequence of events very different from the A, B, and C round sequence of the 1994-2005 era. Startups do Pre-Seed, Seed, and even Seed Extension rounds before reaching an A round.
Growth investing emerged at scale around 2009 when Yuri Milner’s DST made a $200m investment in Facebook at a $10 bn valuation (https://techcrunch.com/2009/05/26/facebook-takes-that-200-million-investment-from-the-russians-at-a-10-billion-valuation/). Since that time many private equity players have adopted the strategy of investing large sums, late-stage, into proven companies. Crunchbase shows that in 2020 the three asset classes looked like this:
  • Pre-Seed Funding $9334m
  • Seed Funding $12.5 bn
  • Series A-B Funding $86 bn
  • Series C an After Funding $109 bn
This week we include two articles pointing to further changes in the venture ecosystem. Firstly Tiger Global is covered by Everett Randle in his Substack newsletter. It is a lengthy and substantive look at Tiger global’s business model and the ability to deploy large sums of capital rapidly while making venture returns for its LPs. That is supplemented by Softbank Vision Fund coverage from Barron’s describing its report of $46 bn profit from its $100bn fund.
Growth investing is now a habit that PE firms and Hedge Funds specialize in. Later in this week’s newsletter, we cover SPACs, which are simply another form of growth investing.
My own preoccupation is with the seed stage asset class. Two weeks ago when UI Path did its public offering I was an interested insider. My UK fund ADV is an investor in SeedCamp, the original seed investor in UI Path. And as part of its partnership with Seedcamp, ADV invested in a Special Purpose Vehicle, injecting capital into UI Path’s Series B round. Today that investment is worth close to 40x the series B price, and it is only 30 months later. I have seen even better results from my portfolio company InFarm, where, since LocalGlobe and Cherry VC (two excellent seed investors) invested, my investment has increased 136x in 48 months.
Seed-stage VCs are, when they perform well, making fabulous returns for their investors. The top-performing seed funds account for a very large % of the unicorns we see around us today. This represents a huge opportunity that was commented on, by Delian Asparouhov from Founders Fund, in response to the Tiger Global piece below:
delian
IMO and based on some of the trends in @EverettRandle's piece on Tiger, the majority of returns in VC in the 2020s will come from:

- mega-funds ($3b+ funds every stage, big brands)

- early-stage value-add ( <$30m, keep the fund small enough to make returns off non-lead checks)
delian
However, institutional LPs dont know how to write checks into a $30m fund, too small

But now there's enough super high-quality $30m seed funds..

That someone could create the first top-tier, more well-known LP brand via a Fund of Funds that assesses & anchors all the nano-funds
For the past 5 years, this is exactly the opportunity I have been working on at ADV in the UK. Today a Silicon Valley team is in stealth at SiganlRank Capital and has developed data analytics (GPRank™ and CompanyRank™ ) that enables ranking of seed investors and their portfolio companies based on data going back to 2000. We strongly believe that we have found a method of injecting capital, at scale, into seed-stage GPs who consistently outperform, and then into their companies as they prove their credentials. For those of you who are in the venture space, this video explaining how GPRank™, CompanyRank™, and SPACs come together to form a new approach to venture will be of interest.
Delian has hit the nail on the head, as it were.
Also this week, the Steve O’Hear story. Read it, you won’t be disappointed. An update on China from the Harvard Business Review and a significant section of the growing normalization of cryptocurrencies and blockchain, despite the spat between Elon Musk and Mark Cuban concerning Bitcoin.
More in this week’s video.
Venture Capital is Changing ...Again
Venture Capital is Changing ...Again
How to Play the Venture Game
Playing Different Games - The Valley of Dunning-Kruger
SoftBank Posts Huge Gains on Vision Fund Holdings, Admits 'Many Regrets'
The Steve O'Hear Story
Steve O’Hear: My decade on the front line of fintech — The Times and The Sunday Times
Understanding China
“Americans Don’t Know How Capitalist China Is”
Crypto Currencies and the Blockchain Ecosystem
Legendary Investor Stanley Druckenmiller: USD Will Lose World Reserve Currency Status
Coinbase overtakes TikTok for #1 position on Apple app store
Coinbase Profit Surges in Crypto Exchange’s First Report as Public Company
Facebook-Backed Diem to Launch USD Stablecoin with Silvergate Bank
Bitcoin is durable, says BlackRock's Rick Rieder
$425bn Wiped Off Crypto Market As Musk Says Bitcoin Is Bad For The Environment
Mark Cuban counters Elon Musk, says Mavs will continue to accept Bitcoin
Elon Musk-owned SpaceX gets paid in Dogecoin for new mission
Sotheby’s crypto-powered auction sells Banksy art for $13M
EBay has officially opened its platform to NFT sales
SPACs Tested
As SPAC Market Unravels, Startups Seek Alternatives
Startup of the Week
Coinbase is banning salary negotiations
Tweet of the Week
Carl Zha
Here comes Chinese Space Station. US banned China frm International Space Station. No problem, China will just build it’s own. https://t.co/rMmKF0bMW4
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Keith Teare, Palo Alto, California