The VC industry in 2019
In Both Sides of the Table, Entrepreneur and Venture Capitalist Mark Suster responds to questions over whether VC is still “a thing”, despite claims of the modern day tech bubble. Suster feels this represents a general misunderstanding of the market. “In fact, by historic levels this may be amongst the best times to invest in seed and early-stage funds.”
Both the amount going into tech-enabled startups and the amount VC funds are raising has risen significantly. But the way it’s being invested has in fact changed. Here are 3 things that have evolved in today’s Venture Capital market:
1. A shift toward mega-rounds and mega-funds
According to Suster, “the funding increases have gone overwhelmingly to ‘mega rounds’ of late stage investments with round sizes of $100 million or more. In fact, the ‘traditional VC’ market has only grown 14% per year and mega-rounds now account for nearly half of the dollars in the industry.”
Last year, $21 billion of funding (16% of the market) came from deals in which investors put in $1 billion or more, and $40 billion from deals of $100 million or more.
Firms like SoftBank, Sequoia Capital and more are raising significant mega-funds and increasing check size for investments across the board.
2. Delaying the IPO
As a result, companies are staying private, longer, and pushing back IPOs by an average of 5 years. That means the value is captured by VCs rather than public markets, making these investments increasingly attractive for venture firms.
According to Suster, “If just Google, Salesforce and Amazon has stayed private for 12 years (today’s IPO benchmark) an additional $200 billion would have been captured in the private markets.”
The way funds are investing in these companies as a result is changing. Suster sees three distinct markets forming out of what is traditionally known as VC: Seed capital (the start), Venture capital (scale or bust) and Growth Capital (private IPOs).
3. AI-enabled deal sourcing
However, human investors are simply no longer enough to help these firms remain competitive. In order to find these deals, monitor their growth and determine which are worth the long-term wait, investors are turning to AI-driven external data analytics to give them an edge.
London-based InReach Ventures recently raised a €53M fund to invest in early-stage European tech companies. But the firm is hiring fewer investors in exchange for highly capable data scientists who can improve their DIG technology, which is used to source companies from across the continent without needing to deploy human resources to find them.
According to TechCrunch, the firm’s software is helping them to combat market fragmentation many previous investors have faced in Europe. Partner Roberto Bonanzinga tells them, “Traditional ventures firms have looked to manage this fragmentation by throwing people at the problem, but if you want true coverage you need to have a presence in every city in Europe. This is how you need to think of our technology platform, as like having a highly trained associate in every city and town across the whole of Europe, providing structured diligent deal-flow. With this data/technology driven approach we can be truly pan-European at the early-stage, even as the first institutional investor on the cap-table.”
InReach is by far not the first to employ AI for deal sourcing. AI in venture capital has been on the rise for years.
Bonanzinga claims, however, that while ML technologies are becoming a hot topic among firms globally, what sets InReach apart is incorporation of this data-driven approach into their DNA, and an understanding of where human judgment comes in. While he used to spend half his time on a plane, looking for companies that might often fall under the radar because they’re not actively looking for funding, the AI his company is developing has changed the way he approaches investment.
“As with any AI company, it’s all about data,” Bonanzinga said. “We have spent the past 3 years aggregating data from across the internet and building algorithms to provide us with significant dealflow.” In an interview with the Financial Times he noted, “What used to be a handcrafted job has become significantly scalable. You become 10 times more productive.”
Learn how to leverage external data for powerful deal sourcing and portfolio management with Outside Insight. Reach out at firstname.lastname@example.org for more.