clock menu more-arrow no yes

Venture Capital Is Dead. Long Live Venture Capital.

While it’s true that the early-stage landscape is changing, VCs are far from extinct.

Universal Pictures

There have been rumblings recently that the traditional VC model could be in danger of extinction, threatened by more contemporary investment sources such as crowdfunding and super angels.

While it’s true that the early-stage landscape is changing, VCs are hardly on the demise, nor are professional VCs losing ground to crowdfunding and angels. In fact, the amount of VC funding increased last year to $33.1 billion in the U.S. Roughly one-third of those dollars were aimed at seed and early-stage funding with $10.7 billion invested — up 37 percent over 2008 investment, when the industry was at its peak.

Rather than looking at the funding landscape as a zero-sum game, with one model rising up at the expense of another, it’s best viewed more as a continuum, with investors across the spectrum matching up with companies at the right stage of development or maturity. The truth is that there is plenty of opportunity for a wide range of investors and entrepreneurs, and a healthy economy depends on diversity — in both the types of businesses and the capital they can access.

If the numbers alone aren’t enough to convince skeptics that VC isn’t dead, here are four more reasons:

  • Angels are launching their own funds. While many believe angels and super angel investors are part of what’s chipping away at traditional VC, in fact, many well-known angels have moved up the food chain to launch their own funds, such as Ron Conway with SV Angel and Aydin Senkut with Felicis Ventures. If VCs were on the demise, this likely wouldn’t be happening.
  • More seed-stage, pre-seed and micro VCs are emerging. Recognizing that earlier-stage startups may not be ready for traditional early-stage VC funding, these funds are helping to support newer businesses — and they’re doing so with the exact same model as the mature VCs, albeit earlier and at a smaller scale. The model is proven and successful, so why reinvent the wheel?
  • Some entrepreneurs still need big investments. On the path to maturity, many promising companies will need big capital in order to drive big growth. You just can’t raise $20 million from crowdfunding, and putting together an angel round of that size is extremely difficult and rare. Big growth sometimes requires big investment, and that’s really only practical and feasible through institutional VC funding.
  • Startups need more than just money. Especially in Silicon Valley, money is increasingly a commodity. The best entrepreneurs often have their choice of investors, with much greater access to capital from a broader selection of sources than ever before. Yet the best, brightest and most promising entrepreneurs still continue to choose established, professional venture funds over angels, crowdfunding and other nontraditional sources. Why? Because the best professional VCs know how to build companies. They can often add tremendous value in operational expertise, hiring, business development, marketing, raising future funding and contacts throughout the industry. That expertise is just as valuable as — if not more than — the actual dollars invested. We’ll also see continued focus on the “platform” model — offering ancillary services such as marketing, recruiting, etc., in addition to funding — with firms increasingly competing on not just the money, but the value they can bring to a startup.

But even as traditional early-stage VC funding will continue playing a major role in the investment landscape, what that looks like will no doubt change as investors and startups evolve over time. What does that mean for entrepreneurs looking for funding? Expect to see several trends:

  • Angels will become more organized (and look more like VCs). We’re already seeing the influence of investment syndicates on AngelList — where groups of angels pool their capital and invest together as a group alongside traditional VCs. How is this different from a VC fund? In many ways, it’s not — it’s investors with access curating their dealflows and pooling capital into companies.
  • Stratification and segmentation of funds. Since micro VC really emerged only seven or so years ago, there has already been a stratification in the micro VC ranks, similar to how there is a top tier of early-stage VCs. Many new firms have also emerged as specialists in particular segments, like e-commerce, SaaS or big data. Both of these trends will only continue with the proliferation of new, small funds.
  • We’ll transition even more toward a push market. There used to be a time when most VCs sat back and let the deals come to them. But now, with the proliferation of new funds, the increased pace of company formation and access to data about new companies, investors are increasingly more proactive when it comes to finding new investments. This trend will only continue, as the level of transparency on both sides as well as the volume of new micro VCs continues to grow.
  • Greater transparency in the process. Even just seven or eight years ago, the process of raising venture capital seemed cloaked in secrecy. Now, that process has been demystified, with partners at many funds blogging, tweeting and otherwise inviting interaction with entrepreneurs via more approachable channels. The information asymmetry has shifted the balance of power away from the seemingly unreachable VCs to give the entrepreneur a bit more insight — and therefore more choice — in finding the right firm to help them achieve their goals. And things like accelerators are helping to streamline the fundraising process, enabling entrepreneurs to discern the best investor fit and be better prepared for the fundraising process.
  • VCs want to see more traction. The fact that there are so many earlier-stage options available will drive traditional early-stage VCs to look for more mature businesses in which to invest. The level of progress investors expect will continue to increase, further allowing the angels, seed- and pre-seed stage and micro VCs to help shepherd businesses up the food chain to traditional early-stage VCs as they mature.

Instead of a massive sea change that will lead to the extinction of VCs, we should expect that the more things change, the more they stay the same. Rather than become obsolete, we’ll see traditional early-stage VC firms become further embedded at the mature end of the early-stage investment spectrum, creating more room upstream for angels, super angels, pre-seed, seed-stage and micro VCs that offers more opportunity to more investors and entrepreneurs than ever before.


Erik Rannala is a co-founder and managing partner of Mucker Capital. Reach him @ersf.

This article originally appeared on Recode.net.