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.