“Competition is always a good thing. It forces us to do our best. A monopoly renders people complacent and satisfied with mediocrity.” — Nancy Pearcy, author
Venture Capital is a private market that has grown exceptionally over the last few years. In 2019, USD$160bn of capital was invested globally, 13 times more than in 2010. Since 2009, Venture Capital funding accumulated USD$754bn with 77,227 transactions. In 3Q 2020 alone, Venture Capital funding in North America, Asia and Europe accumulated USD$72bn. However, by the end of the first half of 2021, a handful of Venture Capital funds control the majority of available resources in this industry.
In the US there are approximately 2,500 VC funds, 74% are funds of less than USD$250mm AUM, 14% between USD$250mm to USD$500mm and 12% funds of more than USD$500mm. However, competition is not fair, with 12% of funds controlling 66% of resources, 14% funds 18% and the vast majority, 74%, only managing 16% of resources. In 2018 Bessemer Ventures Partners raised USD$1.8bn in its tenth fund, the largest ever. In March 2020, General Catalyst raised USD$2.3bn in three different funds. On the same date NEA, raised USD$3.6bn accumulating over USD$24bn in AUM. In April 2020 Lightspeed raised USD$4.2bn in three global funds. Sequoia raised USD$7.2bn in a China, India and US fund in July 2020. Tiger Global recently raised USD$7.5bn in two funds.
Competition in Venture Capital is fierce and not always fair. Reputation and brand recognition are often key elements for Venture Capital funds to maintain a position of strength. Something similar happens with entrepreneurs, whose reputation, experience and connections are fundamental in raising capital and developing the startup.
The following matrix shows the value of Venture Capital and the entrepreneur in this race to be a unicorn. It measures the quality of a fund including its reputation, track record, power to attract outstanding entrepreneurs, above-market advice and experience, outstanding pipeline and non-monetary resources to support its portfolio companies. Quality under this criterion is subjective and focuses on the experience the entrepreneur might have. Quality is not necessarily determined by the size of the fund or the length of time it has been in the market.
1. Potential Unicorn
When a highly reputable Venture Capital fund meets with experienced entrepreneurs we could speak of the birth of a potential unicorn as the combination of the two is explosive. For the entrepreneur this is a beneficial situation as they may be able to generate investment interest from multiple funds, obtaining term sheets and being able to leverage their negotiating power. For some VC funds this could prove to be a complicated transaction as they will have to demonstrate their value-add, track record and capabilities with acumen during the negotiation. In any case both have the motivation to be successful at all costs while maintaining their reputation.
2. Easier transaction
When a highly reputable fund meets a first-time entrepreneur, we could be looking at a potential home run or a major failure. The founder has had the ability to convince a reputable fund to invest in him, either on his own or through third party recommendations. The fund has the opportunity to offer favorable terms on the transaction. Even the degree of competition for this transaction with other Venture Capital funds may be limited.
3. High-risk transaction
When a first-time entrepreneur encounters a low-quality fund, it is the key to a potential disaster. This represents a high-risk transaction where neither party has a strong case for success. Probably neither party and especially the entrepreneur had more attractive options.
4. Strategic transaction
A strategic transaction may occur between experienced entrepreneurs and low-quality funds, both parties recognize their added value by leveraging these capabilities in the success of the transaction. Entrepreneurs may be the party benefiting from better terms and the opportunity to have enough capital to continue their venture.
Just as entrepreneurs compete for capital, Venture Capital funds compete for access to the best ventures. Being a qualified and experienced entrepreneur takes time. The same is true for VC funds. It is not necessarily the case that the best-known fund in the market will be the fund with the highest quality or that represents the best interests of the entrepreneur. There are many biases in the Venture Capital ecosystem.
“If you’re not making mistakes, you’re not taking risks, and that means you’re not going anywhere. The key is to make mistakes faster than the competition, so you have more changes to learn and win.” — John W. Holt, Jr., Xochi manufacturing
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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