Unbundling Venture Capital

[Update 1: Thanks to Jonathan Abrams for pointing out that AngelList's Naval wrote a similarly-titled post about two years ago, though the argument is slightly different; this is no surprise as Naval has been ahead of the VC game for about five years at least. Read Naval's old post here.]

[Update 2: Shai Goldman pointed out that "crowdfunding" should be in this list, as well as the list of things disrupting venture capital, and after sleeping on it, I agree, so I've updated this below to reflect that.]

A few months ago, I wrote a post about seven forces disrupting venture capital (click here to read it). Then, a few weeks ago, I tried to riff on a theory about mobile advanced by some of the folks at USV (click here to read it). I’ve been trying to study venture capital since I moved here, as I have a deep interest in the space and how it’s changing. And, from a long time ago, I studied bundling products and even participated in the design of some bundles. It was fun!

But now, today, I had a new thought: What if venture capital is also being unbundled?

Here are the components that are doing the unbundling:

  1. Accelerators and Incubators: In the old days, VCs would have EIRs and/or deep relationships with technologists who would start companies together, sometimes even at the VC’s offices. This would also allow VCs the ability to own more of the company out of the gate. Nowadays, founders can come from anywhere and give up zero to 5-6% equity to enter these accelerators, and as a result, traditional VCs have to make sure they have an inside track to investing in these companies, attending demo days, or just blanketing them outright with cash.
  2. Angel Investors: There is no shortage of angel investment cash. Newly-minted millionaires. Celebrities. Even founders of currently venture-backed companies that haven’t made any decent progress. And, the good angel investors realize quickly that, in order to really make money on a series of small bets, they have to own more of the winners, and to own more of the winners, they need to lever up, which leads us to…
  3. Seed Firms, or microVCs: These are typically individual angel investors who have banded together, pooled capital, and now increasingly, have raised their own dedicated funds to take on more ownership. The good ones perform a huge service to big box retail VC by making better, smaller haystacks for them to search in. When this is done well, the investors can do quite well, and I’d fully expect the best ones to actually grow into the next incarnation of venture capital firm, though this will take time.
  4. Strategic Investors: These are typically venture arms of corporations, who supposedly offer inside access for deployment or customers, depending on what the space is. Google Ventures is a poster child for this today, as they’ve invested significant resources into building out their team and services model, though there are many others. I am not sure many people understand just how competitive things are with Strategics today. I will have to look at this more and hopefully share more in the future.
  5. Crowdfunding: Hat-tip to Shai Goldman here. This was in my list as a “disruptive” force to VC, but I also think it unbundles the venture capital model as well, at least in the early stages. This has been covered a lot, with companies launching on platforms like Kickstarter, or new fund models like MicroVentures, which looks for deals and then, on a deal by deal basis, allows its massive network of ad-hoc LPs to invest.
  6. [Traditional Big Box VC: This is the spot, at Series A and Series B, where the best investors make their legend. All it takes is one. For instance, how did Benchmark's Matt Cohler have the insight and the access to invest in Instagram's Series A deal, pumping $7m into a high-growth mobile app that manipulated photos? Because, he worked at Facebook and understood how important photos were to the service and how exposed it was in mobile. That $7m was too much for smaller seed firms at the time, and the investment was way too risky for larger growth stage firms or private equity to fund.]
  7. Growth Capital and Private Equity: A good handful of traditional venture firms that are successful have also raised dedicated growth funds to make sure they’re covered in hot companies and also double-down on their Series A and B investments that are doing well. But, this is dangerous territory, because larger private equity have also moved down-market to compete with VCs all the way down to Series B. It’s easy to dismiss these moves as “bubble” indicators, but let’s not forget that firms like Microsoft and Goldman Sachs which bought into Facebook pre-IPO were able to seal deals other traditional VCs could not.

I’m sure I’m missing parts that are unbundled. All of this makes a traditional VC’s job very hard. He or she needs to have a thesis, a view of the future world. He or she needs to have relationships in order to get access. He or she needs to offer something unique, be it an arsenal of services or something so valuable the best will want it. Or, they need to have good timing, to be “hanging around the hoop” when a good deal comes by. It’s about marrying analytics, access, and chance: the analytics to spot something unusual or good, the access to act on impulse, and the chance to lean in and invest at the right moment when there’s too much risk for growth capital but too expensive for the existing investors.

This is how I view venture capital is being unbundled, ripped apart from formation, incubation, to the inflection points, where a host of competitive environments and services exists for founders to exploit. This is yet another reason why it’s being pulled in so many directions. This is another explanation of why firms are wrestling with trying to provide services or just scaling back. Ultimately, what it comes down to for me is brand and mindshare — how do the most visionary investors connect with the right people way before they’re going to start a company, or go to an incubator, or seek angel or seed firm funding? This is the only way venture capital scales, because you can obtain the analytics and network to have the access, but for timing, one has to give themselves every chance to be in the right place at the right time.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2014 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus