Venture capital as an asset class has far outperformed other alternative-asset classes, including private equity, hedge funds and real estate, over the past several years. And it is not slowing down. Pitchbook reports that VC funds across the globe recorded the best performance among all private capital strategies in the first quarter of 2021, tallying an impressive IRR of 19.8%.
Numbers like this suggest that, if I’m a pension fund or sovereign wealth fund, I’m going to place even more of my allocation with venture than I did in the past. This is why, in 2021, for the first time ever, venture firms are poised to raise $100 billion in a single year.
But here’s the thing. The amount of money flowing into venture is now far outpacing the number of fundable opportunities. This is bringing major change to the VC industry. Here are three ways venture will be different in the coming year.
A good LinkedIn network will be more valuable than capital
The one consistent theme I’m seeing in venture-backed startups is a scarcity of talent. And it’s not just the engineering team that is suffering a talent shortage. It’s sales, marketing, finance, human resources, you name it.
The hunt for talent has become so intense that if, as a VC, you ask your founders how you can be most helpful to them, very few will ask you to help them raise more money. Instead, they’ll ask you to help them find and recruit people. They’ll ask you to help them convince this or that person to leave their job at Apple or Amazon and come work for them.
This trend will continue to accelerate in the coming year, to the point where who you know and can inspire confidence with as a VC will be far more valuable than what size check you can write.
Startups will embrace automation
The scarcity of talent will require startups to embrace a new set of tools that can help them automate their processes. These tools will become increasingly vital to their success. A company like Carta, for instance, is a game-changer for startups because it automates the process of managing their cap tables and issuing shares. Other tools automate expense management and HR from the cloud (such as Expensify and Gusto). Already old accounting systems which originated on desktops are starting to look very archaic.
Going forward, this kind of automation will be required for many more functions, roles and specialties, whether it’s bookkeeping, tax compliance or inside sales. That’s why, as a venture investor, I think there is now a huge opportunity to invest in companies that offer tools to automate the administrative aspects of growing companies.
More Wall Street types will make their way into venture capital
Go to the “Our Team” page of any blue-chip firm on Sand Hill Road. You’ll see that almost everybody at the firm was previously the founder of a tech firm or, at the very least, a high-ranking executive with an operational role.
But a change is taking place. We’re starting to see more people with Wall Street-type backgrounds moving into VC firms, particularly those focusing on growth stage (post revenue, and sometimes after achieving over $25M to $50M in recurring revenue). These are often finance professionals who can help with tasks that typical early-stage investors don’t normally think about, like: various industry and regulatory compliances, internal governance, and the overall preparation for an ultimate IPO?
Professionals with financial services expertise rather than tech expertise will become increasingly prominent in the venture universe, especially now that many tech firms, after years of eschewing the public markets, are once again pursuing IPOs early in their lifecycle. Indeed, the tech-heavy Nasdaq saw an impressive 410 IPOs in the first half of 2021, which raised the greatest amount of money on record.
VC is all about investing in disruptive companies. Now VC is being disrupted—perhaps in a good way. It is not being dismantled like, say, the brick-and-mortar retail businesses driven under by Amazon. It is being retooled to do its job better in a fast-changing world with lots of money and a shortage of talent.