September 6th, 2021
“Who drove the development of modern VC?”
While the global history of financial intermediaries and risk capital investing extends back to the earliest civilizations, the development of modern venture capital in America can be traced back to a series of trailblazing investors and entrepreneurs in the second half of the 20th century.
These individuals laid the groundwork for today’s vibrant venture capital economy, in which investors — largely based in Silicon Valley — fund risky technology startups in exchange for equity.
The first investor widely acknowledged to practice venture capital in the modern sense was Georges Doriot. Originally born in France, Doriot moved to the United States to pursue an MBA. Following his education, he remained in the United States, working at an investment bank, teaching at Harvard Business School, and even heading a research and development team in the US army during World War II (Georges Doriot).
Doriot’s most important contribution to venture capital, however, emerged in the years after the war. In 1946, he founded American Research and Development (ARD), the organization that would later become known as the first public venture capital firm (Ante).
The formation of ARD is a seminal moment in venture capital history because up until that point, most investment capital came from wealthy families (Ante). By contrast, Doriot’s new firm leveraged the capital of institutional investors to magnify its impact, laying a blueprint for the structure of the modern venture capital firm.
One motivation behind the establishment of ARD was the sentiment among Georges Doriot and some of his contemporaries that the current American economy and predominant investment structures were too “riskless” (Ante). Doriot felt that more risky bets were required to drive the economy forward and his answer was to create a new investment vehicle in the form of ARD.
In this way, Doriot was continuing a long American tradition of “long-tail” investing, which Harvard professor Tom Nicholas dates back to the high-risk whaling expeditions of the 18th century (Nicholas). Americans have long pursued high-risk, high-reward investments in which only a handful of major successes account for the majority of the profits, posits Nicholas, but it was only with the emergence of ARD that this practice was institutionalized into the robust venture capital ecosystem that we know today (Nicholas).
More specifically, the popularity of the venture capital model became widespread when ARD and Doriot saw their first big win, a successful exit from an investment in an early computer company called Digital Equipment Corporation (DEC) (Nicholas). The gains from this investment alone pushed ARD’s rate of return above market averages, proving both the investment reputation of the firm as well as the viability of the long-tail investment model more generally (Nicholas). As a result, the number of active venture capital firms ballooned into the hundreds by the 1970s, although ARD itself became less of a major player as firms transitioned to the limited partnership model used by VCs today (Nicholas).
The roots of risk capital investing lie on the East Coast, but the heart of today’s venture capital ecosystem is unquestionably Silicon Valley. The emergence of Silicon Valley as a hub for technology startups and venture capital dates back to the 1950s and 1960s, when a group of enterprising young employees dubbed the “Traitorous Eight” created a semiconductor company before founding some of the most successful companies and investment firms on the West Coast (Gerstenzang).
The “traitorous” title comes from the group’s decision to leave Shockley Semiconductor to create their own company, Fairchild Semiconductor (Gerstenzang). This action is significant in its own right because it offers an early example of entrepreneurs taking advantage of California’s low legal and cultural obstacles to switching employment, characteristics that would be important for the later development of a startup ecosystem (Gerstenzang).
However, even more significant are the achievements of the so-called Traitorous Eight in their later, individual careers. Robert Noyce and Gordon Moore founded Intel, one of the most successful tech startups of early Silicon Valley, while Eugene Kleiner and Don Valentine founded Kleiner Perkins and Sequoia Capital, two of the largest venture capital firms today (Gerstenzang). Other members of the group founded several other notable startups and investment firms, all based in the same region.
In this way, the Traitorous Eight laid the groundwork for modern Silicon Valley — the most concentrated group of high-tech startups and venture capital firms in the world.
One member of the group would go on to have a particularly large impact on the venture capital world. Tom Perkins was a founding partner of Kleiner Perkins along with Eugene Kleiner, and he would later become the public face of the firm (Siegel). As noted above, the 1970s and 1980s were a time of expansion in the venture capital industry, but Kleiner Perkins set itself apart by offering a unique style of “participatory management,” in which the firm acted as an active advisor rather than a passive provider of funds (Siegel). At the time, this was a major differentiator, and it now serves as the dominant investment style for the majority of Silicon Valley VC firms.
Equally significant are the backgrounds of Eugene Kleiner and Tom Perkins. While many investors prior to the emergence of Silicon Valley had finance backgrounds, few had concrete business or operating experience. Perkins and Kleiner, on the other hand, brought their entrepreneurial experience to investment roles with great success, like many of their peers in the Traitorous Eight, further underscoring the group’s impact on the development of venture capital best practices (Bottazzi).
In an interesting parallel, today’s Silicon Valley landscape reflects the achievements of another one-time group of colleagues: the “PayPal Mafia.” Just like the Traitorous Eight, the entrepreneurs who founded PayPal in the early 2000s went on to shape Silicon Valley through an array of successful ventures of their own.
Two of the group’s most well-known members are Peter Thiel and Elon Musk, who have gone on to start disruptive companies like Tesla, SpaceX, and Palantir, as well as innovative venture funding organizations like Founders Fund and the Thiel Fellowship (Brehse).
YouTube, Yelp, and LinkedIn were also startups founded by early PayPal employees, while other members of the group altered the venture capital landscape by creating new types of VC firms such as Dave McClure’s 500 Startups (Brehse). While perhaps not as groundbreaking as the actions of the Traitorous Eight, the PayPal Mafia nonetheless continue to exert a significant influence over Silicon Valley, through both influential startups and innovative approaches to venture capital.
Another pair of investor-entrepreneurs who contributed to the current startup landscape is Steve Blank and Eric Ries. Blank and Ries, both serial entrepreneurs, combined their ideas of developing a minimum viable product (MVP) and aggressively seeking feedback from customers to develop a set of best practices called the “Lean Startup” (Spence). At its core, the Lean Startup model rests on the idea that early-stage startups should remain flexible and willing to experiment in order to more effectively deploy resources — as Blank puts it, searching for a business model rather than executing one as a larger firm would (Spence). More specifically, Ries and Blank advocate that Lean Startups should use iterative design rather than “big design up front” development, failing fast and adapting based on customer feedback until they achieve a scalable business model that gives customers what they want (Blank). Today, the language of minimum viable product, iteration, and customer feedback is ubiquitous across Silicon Valley, illustrating the extent of Ries and Blank’s influence on the startup world.
Y Combinator is another innovation from the early 2000s that left a significant imprint on the venture capital landscape. Founded in 2005 by entrepreneur Paul Graham, the idea for an accelerator emerged from many of the problems that Graham and his peers noticed within traditional venture capital (Graham). Chief among these was a reluctance to fund young hackers — most VCs preferred MBA types, or what Graham calls “suits” — and a tendency to make a few, large investments rather than many smaller ones (Graham).
Graham founded Y Combinator with the intention of creating an alternative funding source that corrected for these perceived errors: he would invest in many startups at once, backing young programmers rather than more experienced businesspeople.
Furthermore, recalling some of the pain points in securing funding for his own startup, Graham decided to make the process more founder-friendly by creating standardized terms (Graham). The last element that set Y Combinator apart from traditional VC was unplanned, but its synchronous funding model ended up being one of the most important factors in its success (Graham). Since many of the founders were students, the first Y Combinator was held for three months in the summer. However, it soon became clear that developing startups together in the same place offered significant added value, so YC continued to fund its startups in three month long cohorts called“batches.”
Since its inception, Y Combinator has grown to become the most widely known and well-respected startup accelerator in Silicon Valley and around the world.YC has since inspired the emergence of many similar accelerators across the globe.
Moreover, its success has led to an increased investor focus on finding young programmers, placing many small bets, and developing founder-friendly processes. In this way, YC fundamentally changed the nature of venture capital — it not only emerged as a completely new alternative to traditional VC, but it also influenced investor thought processes and inspired the growth of other accelerators along the way.
The last notable investor to mention in this brief overview of the key players in VC history is Marc Andreessen. Although he is also a more recent arrival to the venture capital scene, he had founded multiple billion dollar companies prior to forming the VC firm Andreessen Horowitz (a16z) with partner Ben Horowitz. However, his impact as an investor is even more pronounced than his influence as an entrepreneur in the early days of the internet.
In particular, Andreessen helped propel a16z to the forefront of the venture capital world through an early emphasis on software. This thought leadership is embodied by a famous essay in which Andreessen declared that “software is eating the world” (Andreessen). Writing in 2011, he argued that technology companies were not in a bubble, but instead were poised to take over all areas of the economy (Andreessen). For this reason, he announced that a16z would pursue a strategy with software startups at its core.
This prediction was largely proven correct in subsequent years, making a16z one of the most successful firms in venture capital and cementing Andreessen’s position as a leading thinker in Silicon Valley. Just as important, this success meant Andreessen Horowitz would become the blueprint for many other venture capital firms. The recent adoption by many VCs of a software-centered approach to investing underscores the significance of Marc Andreessen for the state of venture capital today.
“Who represents the current VC landscape?”
The current venture funding landscape is large, diverse, and always changing. Traditional VC firms span the full spectrum from large incumbents to seed-stage specialists, while more recent funding sources have emerged to give founders an even greater range of options. The following collection of investors, founders, and thought leaders are by no means exhaustive, but it should offer a window into the full scope of venture capital today.
Sequoia Capital is one of venture capital’s most well-known players, and it is a good example of the large incumbents that can be found across Silicon Valley. The firm was originally founded by Don Valentine in the late 20th century, and it has long been a leading light in the venture capital community. According to Valentine, some of the practices that set Sequoia apart included a focus on market dynamics rather than simply the founder’s qualifications, a deep network of resources to help portfolio companies, and teams of specialists that analyze market trends and often identify promising startups even before the founders reach out for funding (Takatkah). Today, many of the most established venture capital firms follow a similar model.
Sequoia’s prominence continues into the present day, with current lead partner Doug Leone recently announcing a new $8 billion fund — the largest US-based venture capital fund in history (Lewis). Along with larger funds, the most significant development in Sequoia’s recent history is a geographic expansion into large, fast-growing areas. Tellingly, the firm now spends half of its money in China (Lewis). This trend is reflected in similarly-sized firms across Silicon Valley. Large, established VCs face new market realities withthe rise of China’s startup scene and a tendency for growth-stage companies to stay private longer, and many have increased fund sizes and expanded geographic considerations in response.
One interesting perspective on the “best” VC firms comes from Chris Farmer, who created a system for ranking venture capital investors while working at General Catalyst Partners (Schonfeld). Farmer’s system, called InvestorRank, is based on Google’s PageRank, with the core idea being that investor success is based more on a network of connections than on past returns (Schonfeld).
The list is a few years old (published in 2011), but it is interesting to note that InvestorRank’s top 10 includes both long-established firms and relative newcomers: in order, it names Andreessen Horowitz, Sequoia Capital, Accel, Benchmark Capital, Union Square Ventures, General Catalyst Partners, NEA, Kleiner Perkins, Khosla Ventures, and Greylock (Schonfeld).
While Farmer’s list is far from authoritative, it gives a good sense of many of the most prominent and well-connected firms in Silicon Valley, and it also offers interesting insights into the importance of investor networks for successful VCs. A decade later these are still the most prominent venture capital firms out there.
On the smaller end of the spectrum are VC firms in the traditional mold, but with a focus on earlier stages in the funding process. One of the best-known examples of this model is First Round Capital, founded by Josh Kopelman. Prior to founding the firm, Kopelman was a successful entrepreneur with several exits, and his success has continued with the transition to venture capital.
Widely known as the first institutional investor in Uber, First Round Capital remains one of the most prominent venture capital firms to focus on the earliest rounds of funding — it is the 6th-most active seed investor in the United States (Olsen). The firm aims to own 7.5% to 12.5% of a company after a seed round, and it acts as the lead investor in ⅔ of the seed rounds in which it invests (Olsen). Another sign of First Round’s innovative approach is the firm’s “Dorm Room Fund,” which offers seed stage funding for student founders (Olsen).
Interestingly, First Round reserves 75% of its capital for follow-on fundings, resulting in the counterintuitive finding that the firm actually invests more in early stage than seed stage rounds (Olsen). Nonetheless, First Round Capital’s strategy continues to revolve around investing at the earliest stages, and its success with investments such as Uber, Square, and Warby Parker mean that Josh Kopelman and his firm remain one of the most influential seed-stage VCs around.
Another small firm dominating the early-stage landscape is Benchmark Capital. With only five equally-ranked partners and a small support staff, Benchmark is unusually lean and egalitarian for a venture capital firm (Konrad). However, this has not stopped the firm from becoming unusually successful. Over the past decade, its eight funds have paid out over $20 billion dollars to investors, an astonishing 1000% increase that outshines the returns from most billion-dollar funds raised by much larger firms (Konrad).
Like First Round Capital, Benchmark focuses on the first or second institutional rounds of funding — although unlike First Round, Benchmark aims to lead the round and occupy a board seat (Konrad). The firm’s uniquely minimalist approach has worked out well thus far, with successful investments including Dropbox, eBay, Instagram, Yelp, Zillow, Twitter, Uber, and Snapchat (Konrad). For this reason, Benchmark Capital holds a reputation as one of the most impactful early-stage VCs in Silicon Valley, and it also serves as an excellent example of a smaller, early-stage firm that nonetheless operates with the structure of a traditional VC.
Along with the traditional source of venture capital firms, there are also a variety of other innovative options available to founders seeking capital. One such alternative is AngelList.
Founded in 2010, AngelList is a platform that seeks to connect entrepreneurs with angel investors. It has three main branches: one for angel investors, one for products seeking funding, and one for startup job-seekers (Mascarenhas).
Since its founding, AngelList has grown prodigiously, and it now has around $1.8 billion in assets under management (Mascarenhas). Despite its popularity, however, the platform has also been somewhat controversial within the venture capital community, particularly during its early days. Fans of the platform have always appreciated its ability to connect first-time founders with investors, but early critics worried that it would decrease the importance of relationships in investing or incentivize investors to simply follow trendy deals (Suster). Moreover, some VCs felt that the platform was unnecessary because their inboxes were already overflowing with potential deals (Suster).
Writing in 2011, shortly after the launch of AngelList, Upfront Ventures partner Mark Suster concludes that the platform has both pros and cons: it can be a useful resource for founders to fill out a round, but it shouldn’t replace the difficult and important work of building relationships and finding the right core investors (Suster).
Regardless, AngelList now constitutes an important alternative funding source in the startup community, and it is one of the places that founders seeking funding can consider.
Another new option for venture funding to emerge in recent years is the accelerator model, best exemplified by Y Combinator. Founded by Paul Graham in the early 2000s, Y Combinator offered a new alternative to traditional venture capital, bringing together young founders in a 3-month accelerator program including training sessions followed by a “Demo Day” to investors to build interest for a potential seed round (Moed). In addition to the training and resources, Y Combinator also invests $150,000 in each startup in exchange for a 7% stake in each company (Moed).
Many founders who have participated in the program cite the alumni network as the accelerator’s most valuable asset (Moed). This is undoubtedly true for founders in a wide range of roles, but it seems especially applicable to the career path of Sam Altman, a member of the first class of Y Combinator startups who later succeeded Graham as the president of YC (Loizos).
Although he recently stepped down from the role to focus on his new startup OpenAI — a collaboration with Elon Musk, among others — Altman had a major influence on the program’s development. As president, he continued to build upon the strong model at the core of Y Combinator, but he expanded its reach, adding new product offerings, increasing class sizes, and extending into new geographies (Loizos).
As a result, YC not only maintained its reputation as an accelerator that produces the best founders, but it also continued to attract more attention from both entrepreneurs and follow-on investors (Loizos). Altman is no longer at the helm of Y Combinator, but the program remains an excellent option for young founders seeking mentorship, development, and like-minded peers, as well as for investors looking for the next big thing. In this way, Y Combinator stands as a strong alternative to traditional venture capital, reinforcing the viability of the accelerator model for fundraising founders.
Corporate venture capital is another potential source of funding that falls outside the typical model of a VC firm. While corporate venture capital arms often have a similar structure to traditional VC firms, their objectives are slightly different. Rather than simply investing in the hopes of getting “big wins” to maximize profit, corporate VCs also consider more strategic elements such as new technologies or intellectual property that could be useful to the parent company. They also seek to track emerging trends in the industry.
Despite these varying goals, however, startup founders should take notice of corporate VC as a potential funding option. Corporate VCs participated in just 20% of VC deals in 2017, but that number is steadily increasing (Hoey). Corporate VCs can also benefit founders by providing deep industry expertise and useful advisory. Furthermore, they often monitor emerging startups with the intent of acquiring those with innovative or industry-leading technologies, so connecting with corporate VCs can be a smart networking move for founders looking to eventually exit (Hoey).
The discussion of alternative funding sources would not be complete without mention of another recent player that has altered the investment scene: SoftBank. SoftBank, founded by Masayoshi Son in the 1980s, is a Japanese conglomerate focused largely on technology — the name was originally short for “bank of software” (Fiegerman).
Investing aggressively in the early internet throughout the 1980s and 1990s, SoftBank quickly became known for several big successes, as well a few major losses (Fiegerman). In recent years, it is best known for its Vision Fund, a massive $100 billion venture capital fund that is designed to invest in tech companies that Son believes will shape the future (Fiegerman).
This unprecedented infusion of capital into Silicon Valley has shaped several recent trends, including rising startup valuations and a tendency for growth-stage companies to stay private for longer. The original Vision Fund was largely viewed as successful, despite criticisms that SoftBank was warping the system by providing the cash that allowed unprofitable companies to continue to grow (Fiegerman). However, the rapid fall of WeWork, a major SoftBank investment, has now led many to question the SoftBank model, casting doubt on the future of another planned megafund called Vision Fund II (Bilot).
Regardless of what the future holds for Son and SoftBank, the firm has had an unquestionable influence on the current venture capital environment, between its massive fund sizes, aggressive investment strategies, and unprecedented equity stakes in late-stage startups — sometimes seeking up to 20-40% ownership (Bilot). Traditional VCs have been forced to react, often by creating larger funds of their own, and SoftBank’s presence is something that fundraising founders would do well to keep in mind.
Along with the key players that illustrate the wide range of funding options available, there are also a number of thought leaders whose ideas have had a significant impact on the VC landscape.
One notable VC who embodies the Silicon Valley ideal of influential thought leadership and investment success is Fred Wilson. As a founding partner, Wilson built up a devoted following through a blog he started the same year he founded Union Square (CBInsights).
He has backed up his thinking with impressive results: Union Square Ventures has had at least one billion-dollar exit in its portfolio every year since 2011 (CBInsights). Wilson is also known for being a great mentor to founders, calling himself an “investor who cares” (CBInsights).
Another thought leader to pair a widely-read blog with a prominent investment career is Benedict Evans, a former partner at Andreessen Horowitz. Focusing on the tech and media space, Evans has carved out a thought leadership niche over the past several years through a weekly newsletter with a readership in the hundreds of thousands.
He is also known for his annual technology trends report (O'Hear). Evans has recently made a switch, moving from his post at Andreessen Horowitz to London-based Entrepreneur First (O'Hear). EF has a unique model among venture capital firms, investing in individuals pre-team and pre-idea before helping them found their startups (O'Hear).
Jason Lemkin also combines thought leadership and VC investing, although his career in venture capital has profited even more directly from his role as a thought leader.
Lemkin started out his career as an entrepreneur, founding several software-as-a-service (SaaS) companies before starting to attract an audience by blogging and answering questions on Quora about SaaS businesses (Loizos). Later, he started his own website and then began hosting events, including an annual “SaaStr” conference that attracts thousands (Loizos).
Lemkin just recently decided to start a venture capital fund, calling it SaaStr and planning to focus exclusively on SaaS startups. He is the only general partner at the fund, and he was able to leverage his reputation as a thought leader to raise an impressive $70 million — a large amount for a debut fund (Loizos).
Furthermore, his prominence in the SaaS space means that Lemkin plans to use an inbound-only philosophy where founders seek him out rather than vice versa, an approach that his role as a thought leader makes possible. Lemkin’s success in sourcing deals and raising money were facilitated by his role as a well-known thinker in the VC space; time will tell if his investments will benefit in the same way.
Reid Hoffman’s thought leadership takes almost the opposite trajectory to that of Jason Lemkin, with his investment success preceding his role as an influential figure in venture capital. Rising to prominence first as COO of PayPal and then as founder of LinkedIn, Hoffman eventually joined VC firm Greylock as a Partner (Olsen).
The 20th-most active VC of the past decade, Greylock has made a series of notable investments including Dropbox, Workday, Facebook, and LinkedIn, and it is currently investing a $1.1 billion fund (Olsen). Alongside his work as a VC, Hoffman has also launched a popular podcast called Masters of Scale, leveraging his impressive resume to reach a wider audience and build a reputation as a thought leader in Silicon Valley.
Mary Meeker, meanwhile, broke into Silicon Valley following a prior career on Wall Street, and her transition to venture capital is a direct result of her reputation as an emerging technology thought leader. As an analyst at Morgan Stanley early in her career, Meeker began publishing an annual Internet Trends Report (Levy). The report gradually gained a large following over the years, and after several years of inquiries from Silicon Valley, Meeker finally joined the VC world as a partner at Kleiner Perkins in 2011 (Levy).
Today, the release of her Internet Trends Report is a major event in the tech world, and it can even drive increased use of the apps and services it mentions (Levy). Meeker now serves as a founding partner at Bond Capital, and she remains an influential voice among venture capitalists.
On a firm level, the venture capital group with the greatest emphasis on thought leadership may be Andreessen Horowitz. With an influential blog incorporating the insights of its partners, the firm is unique in its use of thought pieces to build its brand and shape Silicon Valley thinking.
This has also allowed individual partners to carve out influential niches in the venture capital world; Li Jin is one partner who exemplifies this trend. Jin’s general focus is on early-stage consumer tech, but she is best known for defining and analyzing what she calls the “passion economy” (Jin).
Noting the growth in online marketplaces, Jin predicts that platforms allowing individuals to monetize their unique skills and passions will increase in the coming years (Jin). She cites emerging examples such as Substack and Podia, and writes that the Gig Economy may transition to a Passion Economy as the personalization that has come to marketplaces for physical products begins to apply to the market for services as well (Jin).
From her podium as a partner at Andreessen Horowitz, Jin has a unique opportunity to disseminate her ideas. Honing in on a unique and growing segment of the economy, she has used the platform to elevate her reputation as a leading thinker in venture capital, continuing to boost the Andreessen Horowitz brand in the process.
“Where is the fundraising landscape heading and who is leading the way?”
Venture capital is constantly evolving as founders come up with new ideas and investors seek higher returns. The following section details some of the new trends in VC, as well as the key players leading the way.
One of the players rethinking the ideas behind traditional VC is Entrepreneur First, a London-based “talent investor” founded in 2011. The core idea behind EF is that many startups that could be successful are never created due to a lack of available co-founders (O'Hear). For that reason, EF funds individuals before they have a startup, then helps them find co-founders and develop and scale an idea (O'Hear).
The firm uses an accelerator-style model, with several months of training and collaboration leading up to a demo day for investors (O'Hear). So far, the model has been relatively successful: the firm has backed several promising startups, one of which was recently acquired by Twitter and many of which have received follow-on funding (O'Hear).
EF is now expanding with a new $115 million fund — one of the largest pre-seed funds in history — and it plans to continue expanding globally and growing its ties to investors in Silicon Valley (O'Hear). Significantly, the new fund also includes institutional investors, many of whom are cautiously trying out the idea of “talent-first investing” for the first time (O'Hear). EF offers a fresh new approach to venture capital investing, and its success (or not) will have a major impact on the trajectory of the concept going forward.
Andreessen Horowitz is far from a new addition to the venture capital scene, but it illustrates the ways that some of the major players are continuing to adapt — in this case, by renouncing its official status as a venture capital firm. The SEC limits cryptocurrency investments to no more than 20% of a traditional VC fund because cryptocurrencies are deemed a “high risk” category (Konrad).
For that reason, Andreessen Horowitz decided to renounce its VC exemptions and register as a financial advisor (Konrad). Now, the firm can freely trade in higher risk categories such as cryptocurrencies, and it could even invest in public equities as well.
The decision to change its status with the SEC came as a result of Andreessen Horowitz’s plans to launch more specialized funds in the future to stay competitive.
The current venture capital landscape is largely divided into firms that offer smaller, more specialized funds and those offering larger, generalist funds. Recent years have seen increased pressure on traditional VC firms like Andreessen Horowitz from above (in the form of megafunds like SoftBank) and below (in the form of experienced angel investors). This move is one innovative attempt to find new approaches and stay ahead of the competition; it will be interesting to see if other prominent VCs follow suit.
Several other trends are emerging that have the potential to redefine the investor-founder relationship.
On the startup side, the continued growth of the Gig Economy, as well as the rise of what Li Jin calls the Passion Economy, represent likely shifts in the types of ventures seeking funding. In the Gig Economy, employees are essentially freelancers or contractors, changing the entire dynamic of the business model.
This can already be seen in companies like Uber, which have received generous amounts of venture capital despite a lack of profitability.
The Passion Economy, meanwhile, involves individuals monetizing their unique skills and passions to provide services for a loyal customer base (Jin). While companies such as Substack and Podia already exemplify this trend,they have yet to reach the level that Jin predicts. When it does, however, it will also present a new set of economics for founders and VCs to grapple with — in this case, the startups seeking funding would largely be marketplaces enabling the connections between creators and their audiences, rather than more isolated stand-alone firms.
Other startup-related trends are beginning to spill over into the corporate world in the form of both “intrapreneurship” and corporate venture capital. Intrapreneurship, as described by MIT’s Meredith Somers, is the concept of embedding an entrepreneurial ecosystem within a larger company — and she argues that it is becoming an increasingly important element for many companies seeking to fend off new, more nimble competitors (Somers).
Emphasizing that entrepreneurship is simply a method of creating value through innovation, advocates of “intrapreneurship” say that a startup environment is not always necessary for this attitude to thrive. While corporate bureaucracy can often stifle innovation, larger companies have been able to carve out innovative spaces through initiatives like idea fairs, hackathons, “sandbox funds,” and innovation time — Google’s “20% time” is one well-known example of this, where employees have the option to work on side projects of their choosing (Somers).
Many notable products have emerged through intrapreneurship, including the Post-it note, Gmail, and the iPod (Somers). However, like startups, many ventures within larger companies also fail. It is important that companies keep in mind the risks inherent to innovation, even while they continue to incentivize this risk-taking in order to stay ahead.
In corporate venture capital, meanwhile, larger companies are attempting to adopt some of the Silicon Valley approaches from the opposite end of the investor-entrepreneur relationship.
While corporate venture capital (CVC) has been around for a while, it has also seen significant growth in the past several years. Over a thousand major companies worldwide have launched CVC funds, and the amount invested by these funds increased 100% from 2014 to 2016 (Caillard).
Unlike traditional stand-alone VC firms, CVC funds often have strategic objectives rather than a narrow focus on achieving high returns. In particular, these funds seek to identify new trends within the parent company’s industry, and they also position the firm well for potential acquisitions (Caillard). Moreover, the funds can be attractive investors for startup founders because they often bring extensive industry expertise, as well as an increased chance of acquisition if the founder is seeking to eventually exit.
Founders are also embracing new innovations within the fundraising process itself. One such innovation is investment crowdfunding — or equity crowdfunding — where investors are crowd-sourced, but also receive a small stake in the company (Gaskell).
This is a divergence from some more traditional sources of crowdfunding such as Kickstarter, where investors are incentivized by product offerings or simply benevolent curiosity rather than equity (Gaskell). Investment crowdfunding is also a fundraising technique witnessing significant growth: the World Bank predicts that crowdfunding in developed countries will be an almost $100 billion-per-year market by 2025 (Gaskell).
Direct listings are another way that founders are embracing new approaches to financing, albeit at a later stage in the company’s development. In recent years, direct listing has emerged as an alternative to the initial public offering (IPO), particularly among tech companies.
A direct listing is different in several regards, ranging from procedural differences to the fact that no shares are actually sold in a direct listing, and no capital is actually raised (McGurk). Rather, the purpose of a direct listing is simply to enter the public markets as an established company — and to eliminate some of the stock dilution and pricing uncertainty that accompany a traditional IPO (McGurk).
Proponents of the direct listing cite greater control and more accurate information for the company as some of the main advantages of the process. However, it is worth noting that this approach is still relatively new — when Slack went public in 2019, it was only the second company (after Spotify) to do so via a direct listing (McGurk). It remains to be seen to what extent founders embrace the trend in the future.
Another trend emerging in some corners of Silicon Valley is a greater reliance on big data among venture capital firms. Already heavily adopted among traders on Wall Street, the more automated approach is beginning to take hold in certain West Coast VCs as well.
Early-stage VC firms like SignalFire, Tribe Capital, Correlation Ventures, and NFX guild all use proprietary databases and data science methods to source and evaluate investments, with some of them even leveraging data analytics to help their portfolio companies find and attract talent (Davis). These VCs remain in the early stages, so the efficacy of the approach is still largely unproven. Time will tell if big data will be as successful in VC as it has been in other areas of finance.
Finally, some changes have yet to arrive on the venture capital scene, and remain mere predictions — but if the VCs predicting them are proven correct, they would have major consequences for the state of startup fundraising.
The first such change is the emergence of venture debt, a theory put forward by former VC Alex Danco (Danco). Pointing out that the current equity-based venture capital model is a result of the high risk associated with young startups, Danco posits that the tech world is on the brink of developing more consistent revenue projections and is therefore more likely to adopt debt financing (Danco).
This is true, he says, because the Software-as-a-Service recurring revenue model used by many startups now seems relatively stable and mature — future cash flows and costs of capital are becoming more predictable for both investors and operators (Danco). In this way, the economics behind SaaS startups almost seem more similar to regular finance than venture capital, opening the door to debt financing rather than equity.
While this development has yet to take hold — many founders remain wary of venture debt — Danco argues that it is likely to become another option for fundraising founders in the future, offering a particularly attractive alternative for those who would rather not subscribe to traditional VC’s narrow, growth-centric vision of success.
Paul Asel, partner at NGP Capital, also has several predictions for the future of venture capital. Noting recent developments in established firms such as Andreessen Horowitz and Sequoia Capital as well as the arrival of new players like SoftBank, Asel predicts that venture capital will increasingly be composed of larger, more specialized funds rather than the small, generalist partnerships that once led Silicon Valley (Asel).
He credits this development to the more capital-intensive needs of today’s startups as they compete with industry incumbents rather than establishing new industries altogether as companies were able to do in the early days of computers and the internet (Asel).
Asel also views the trajectory of venture capital as an echo of investment banking and private equity, industries that also made the transition from small partnerships to large, complex firms as the need for corporate structure grew alongside increasing demand for capital (Asel).
These changes are still in the early stages — and Asel acknowledges that small, early-stage VCs will never disappear entirely — but if the growth and specialization of funds continues as he predicts, it could have a major impact on the venture capital landscape.
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