There are two macro trends occuring within venture capital (VC) which are combining to have a transformative impact, writes John Greathouse of Forbes
1. Specialised Seed Funds and Huge Generslust Funds
The seed funds tend to be highly fragmented, targeting specialized and narrow niches whilst the bigger funds (Founders Fund, A16Z, Sequoia, Kleiner Perkins, Benchmark, Bessemer, IVP, etc.), are relative generalists, investing in a wide variety of industry sectors.
2. Frontiertech stocks
The other trend is the emergence of frontier tech, encompassing drones, space, augmented reality and virtual reality. Between January 2014 to June 2015, CB Insights notes that $3.15 billion was invested in such companies, across 183 deals, as shown in the following graph.
Graph via CB Insights
The smaller funds seed the innovation, and once there is validation, the larger funds go for the series A, B and C rounds. Those that don’t get funded , die or get swallowed up.
Most frontier tech deals, because they are not only solving problems in new ways, but often also creating new markets, ultimately require relatively large amounts of capital. Thus, the combination of small, specialty funds and large, generalist funds is an ideal match for the emerging world of frontier tech.
Despite the power of these trends, their long-term impact on VC returns is unexplored territory. A number of questions will only be answered over time, including:
- Will the small funds maintain meaningful positions after big funds invest?
- There is significant risk in startups – especially in frontier tech. Will the inevitable failures sour the market?
- Will the small firms have adequate capital to allow their frontier tech portfolio companies to prove their value prop sufficiently to attract the attention of the megafunds?
- Will mid-tier funds become irrelevant as the larger funds continue to invest earlier and earlier in companies’ life cycles?
Given that the average time to exit for a venture backed company is five years via M&A and seven years via IPO, we are still several years away from knowing the full impact on frontier tech investing.
The collision of these two trends will result in the creation of a handful of companies that will have an outsized, global impact.