State of Venture Capital

All-In Podcast

March 19, 2021

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Key Points

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1. The players are changing for the better. Founder demographics are shifting slowly but surely. Meanwhile traditional VC investors are getting disrupted, with the “lmk how I can be helpful” model ceding ground to solo capitalists, nontraditional managers, and crossover investors.
2. Inflation in quantum of capital = more money at higher prices = better terms for founders and employees. Founders enjoy lower costs of capital, enabling them to be generous with employees when it comes to liquidity and option value.
3. It’s a founder’s market for financing growth in the late stages. Mega deals (especially Fintech), new options like trading MRR for ARR and ecommerce financing, and SPACs have upended the traditional playbook. Founders now have plenty of options to fund growth.

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Founder demographics and stereotypes are shifting

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• Females have lower representation among founders, but their influence is growing and winning more venture capital backing. The US is 50/50, while female-founded companies made up 23% of all deal activity in 2019, up from 12% in 2010.¹
• Racial diversity is still lacking, with white founders making up 77% of all deal activity in 2014-2019. Black founders were only 1%.²
• But the young tech bro stereotype is cracking: a 2019 academic study cited in the NYTimes showed the average age of tech founders is 42, and founders of the top 1% growing companies are 45.

¹Source: Pitchbook Female Founders and CEOs in the US Venture Ecosystem 2020.

²Source: “Untapped Opportunity: Minority Founders Still Being Overlooked“, Crunchbase, 2019.

³Source: US Census.

⁴Source: “Age and High-Growth Entrepreneurship”, American Economic Association, 2020.

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Changing demographics of VCs for the better, but a long way to go

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• The % of female VC decision-makers has grown more than 2X in five years, to 14.2%.¹
• Of the larger firms that have raised $1B or more since 2015, 26.6% have 2+ female decision-makers.
• Still, 61% of the analyzed firms have zero female decision-makers, similar to a year ago.
• 80% of venture firms don’t have a single Black investor.²

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¹Source: Axios and Pitchbook/SEC data, analyzing all US-based VC firms with active funds raised 2015+ of $100M+

²Source: Techcrunch

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Different types of investors emerge and compete

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• Generic “value add” VC is no longer differentiated.

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Different types of investors emerge and compete

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• Rise of solo capitalists and atomization of established firms. The importance of individual brand has been steadily increasing in venture capital, as in general culture, for quite some time. Founders choose individuals and relationships over firms and institutions.

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Different types of investors emerge and compete

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• Non-VC investors are becoming more active in venture rounds, with almost 60% of 2020 deals including at least 1 non-VC investor (CVC, PE, SWF, crossover, etc).

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Different types of investors emerge and compete

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• Crossover funds are emerging as a new force
• Tiger Global announcing a deal every 48 hours so far in 2021
• Platforms vertically integrating from public equities all the way to down to seed (eg. Coatue)
• Largest hedge fund launches of 2020 born as crossover funds (eg.Vetamer, XN)

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XN

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Inflation in quantum of capital = more money at higher prices

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• In early stage, deal sizes keep growing. Average deal size up 3X over the last 10 years.

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Inflation in quantum of capital = more money at higher prices

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• In late stage, investors double and triple down on mega deals, ballooning the average round size over 5X in 10 years. Fintech leads the way.

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Higher pre-money valuations = Decreased cost of capital for founders = Less dilution for founders and employees

• This is particularly good IF we can continue building founder diversity.

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• As exits happen, more distributed ownership, more people going out into the investing community as angels and solo VCs.

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Better terms means better outcomes for employees that get paid in equity: more liquidity, more optionality

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• Companies are doing more secondary transactions, and lengthening the exercise window of their employee options packages.

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VC is no longer the only game in town -- new players emerge to help fund growth

• As recurring and re-ocurring revenue businesses have become better understood, companies can now finance growth without raising dilutive equity capital.
• Within 3 months of 2020 we saw 10 years worth of growth in ecommerce. This growth needs to be financed in a democratic way.

¹Source: Pitchbook.

²Source: SaaStr.

³Source: Shopify “Ecommerce boom fuels record online competition”

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Pipe makes revenue streams a tradable asset; Clearbanc makes accessing cash advances algorithmic for ecommerce

• Within 9m of launch, Pipe has connected 3500+ customers and over $1B+ ARR to investors willing to purchase revenue streams, empowering companies with growth capital instantly in a non-dilutive way.

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• Clearbanc companies captured 2X more growth than their peers in 2020 by accessing revenue-based financing. Over $1.6B invested to date, with 8X more women funded than VC.

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• ....meanwhile venture debt, crowdfunding, that have existed for a while but have not seen major innovation.

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SPAC alternative to traditional IPO

• Emergence of SPACs is shortening time to IPO. Time from initial VC investment to IPO has been stuck between 7-12 years for a decade but has started to come down in 2020 & will continue to shrink with SPAC activity.

Exits Are Bigger Than Ever Before

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• Exits up 6.75x over the last 10 years.

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