3 minute read / Sep 10, 2013 /
The VC Firm of the Future
The venture capital fund of the future will perform the same tasks as the venture funds of today: help portfolio companies, evaluate new investment opportunities and build networks of other investors, potential hires, and founders.
But to succeed over the next 25 years, venture capital firms must increase the scale and sophistication of each of these duties by order of magnitude through technology. In the five years I’ve worked in the venture business, I have witnessed tremendous change in the industry driven by intensifying competition for returns.
The concentration of returns IPO and M&A markets fuels VC rivals to vie aggressively for the opportunity to invest in hyper-growth startups. One company’s initial public offering, Facebook, provided 77% of returns from venture backed IPOs in 2012. In the same year, 10% of the acquisitions generated 50% of the proceeds in the M&A market. Despite a decrease in the total number of active funds, competition has never been as fierce in the venture industry as today.
To triumph in this market, I believe venture capitalists must do three things. First, they must create continuous information asymmetries. Second, they must convince entrepreneurs they are the right partner. Third, they must employ technologies to benefit their portfolio companies.
In the same way hedge funds scour data sources for insight on investments in the public markets, venture funds of the future will deploy technology to programmatically discover, evaluate and prioritize up-and-coming startups for partners to pursue. There has never been more data collected on startups than today. Whether it’s iOS app store rankings, web traffic growth, LinkedIn profiles, Twitter followers, job listings, Crunchbase financing history the list of data-rich sources stretches to the floor.
Processing that data is the key to creating consistent information asymmetries. Having created that information asymmetry, the VC of the future will be positioned to win the investment opportunity.
The venture industry has transitioned from brand building through exclusivity to an era of marketing through accessibility. The venture fund of the future must contribute to the daily conversations of founders and entrepreneurs, and foster the startup community.
Those conversations occur on blogs, Twitter, LinkedIn, HackerNews, Quibb and a litany of other sites. By actively participating in the discussions, venture capitalists build rapport and demonstrate expertise which are critical in an era of fierce competition.
Once committed partners, venture capital firms will use technology to further the success of their portfolio companies. This technology will take many forms including fostering internal communities, providing competitive intelligence, sharing recruiting tools, and accessing preferred legal, recruiting or marketing help.
In short, the emphasis in the words financial services will shift from financial, raising and investing capital, to service. The firms that embrace technology to find entrepreneurs at the right time, engage them and assist them in achieving the success of their dreams will be the VC firms of the future.