How Venture Capital Is Responding To Seed Stage Disruption
There has been much written and discussed about the inevitable decline of the venture capital industry as we have come to know it. For a variety of reasons, such as it is cheap to start a consumer Internet company and see early results, there are a dearth of IPO’s, VC funds are too large to make small investments, there is an obvious shake-up in motion.
Yesterday, successful NY seed stage fund, Betaworks, announced it raised a new $20MM fund. With some great investments in Twitter, bit.ly, Tumblr, to name just a few, and thought leadership in the real-time web, John Borthwick and the team are doing a fantastic job. I was not surprised in the least that they were able to put together a new fund.
What made me pause was the list of new investors:RRE Ventures, DFJ, Softbank, and Intel Capital. Venture capital firms. Investing in another venture capital firm. With Sequoia’s leading the $2MM investment in startup incubator, Y Combinator, I am beginning to see a trend.
Here are a few strategies traditional venture firms are employing to stay relevant in early stage venture:
- Fund of Funds To Leading Early Stage Firms: Expect to see more direct investments from large VC firms into micro-VC firms, such as Baseline Ventures, Harrison Metal, Maples Investments, and Felicis Ventures.
- Formal Partnerships Between VC Firms and Micro-VC Firms
- Seed Programs: Charles River kick started the trend with its QuickStart program and Spark Capital followed that up with Start@Spark. Both provide an online application where it provides quick investment decisions that fall outside the traditional partner voting requirements. Both provide $250K in debt, which converts at a 20%-25% discount to the next round of financing. Most troubling to entrepreneurs, both programs come with an option to contribute 50% of the amount raised in that next round.
I suspect we will begin to see more of #3, and in creative ways, to help VC firms get access to as many quality early deals as possible.
There is a huge opportunity for a top tier VC firm to create a new model because none of them seem to be doing it right. There have been many exits recently by the micro-VC firms, and I dont get the sense the VC seed programs are doing as well. Here’s why:
- none are acting like true micro-VC alternative, focusing mainly on increasing deal flow via online application
- none are providing equity ($250K debt and 25% discount to Series A) and financing flexibility (Up to say $1MM)
- none have public face that is managing fund, leveraging firm entrepreneur network, and helping companies be successful
- none are operated independently from parent firm, and leveraging benefits of affiliation
- none are marketing and syndicating with other Micro-VC firms
- none are publicizing seed deals (Not included on sites)
Expect to see one of the leading venture firms get into this in a big way.
