This December marks 20 years since I made my first venture investment. I wrote about the specifics of that company here, but instead of reliving that one company, here in another bout of nostalgia I am going to reflect on what remains the same and what has changed in my 20 years as a venture capitalist.
In 2014 the US VC industry is on a pace to invest over $40B in some 4,000 companies and venture firms across the industry will likely raise over $25B. This compares to 1994 when the industry invested $4.1B in just over 1,200 companies and raised $7.6B. Further, the innovation is far far more global with markets such as China and India raising and investing significant amounts of capital, up from virtually nothing 20 years ago, while markets where there was some level of VC in 1994, such as Europe and Israel, have also seen tremendous growth and expansion. The largest financings of 1994 were companies that raised $20M, while today financings of north of $100M are not uncommon and the average VC backed IPO in 1994 was for a company raising $25M at just under a $100M value after being in business for 5 years as compared to 2013 when the average VC backed IPO company raised $137M at just under a $800M value after 8 years. So on the surface, the industry has changed significantly in the past 20 years.
Despite this outward appearance, as I thought through the day in and day out of what we do as VCs, much remains the same. Our goal is to identify and align closely with talented founding teams, target investments into companies that can participate in or create massive markets, can scale rapidly, have deep sources of competitive advantage relative to incumbents or other emerging players, and have potential business models, often leveraging technology platforms, that show high degrees of operating leverage and recurring benefits of scale. While the specific trends change, the industry and the companies we support continue to perform best when there are massive platform shifts under way as this creates the environment where smaller, nimbler companies can identify and take advantage of trends far more quickly than larger companies. The industry is also still comprised, with a few notable exceptions, largely of small partnerships raising capital from limited partners with a long term outlook and an ability to manage the illiquidity inherent in financing small companies in nascent markets. Further, we as venture capitalists now and then sell a commodity (money) that needs to be wrapped in a customer service layer that provides value to our entrepreneurs such that we can be the preferred partners for the most talented executives and have a positive impact on the companies we support. The best VCs from 20 years ago were preternaturally curious, knew how to jump on trends early and how to work effectively to support the best founding teams, and this remains the case today.
While the day to day activities remain the same, there are clearly changes in what I see on a daily basis. First and foremost, the average founder today is far more educated on entrepreneurship and on strategies that are most likely to lead to success. This is in part due to entrepreneurial studies becoming a core part of college and business school curriculum, but more so due to the amazing breadth of information and case studies available at the fingertips of every aspiring founder. Second, the venture industry is far more transparent today with the most effective VCs regularly communicating with founders via a variety of channels on trends, best practices, important issues and the specifics of their own investment strategies. It is amusing to look back on when I wrote my prior firm's first website that this was a controversial decision given that in the prior 20+ years of their history they never even had a brochure. Given founders with a deeper background and understanding of entrepreneurship, the third change is that VC industry as a whole has become far more specialized. It is no longer sufficient, to deliver on our promises to founders, to be a sound source of general start-up business advice (although this still has value), but rather we also need to be deep in the markets we participate in with a clear point of view on specific strategies, tactics and resources that will be helpful to founding teams. I looked back at the investments my prior firm made around the year I joined and they included software, communications, biotech, healthcare services, retail, media and financial services companies. There are very few, if any, individual venture firms anymore, that cover this breadth of activities and if they do they are either investing at a very late stage and/or with multiple teams of specialists. Interestingly, this move towards specialization comes as the breadth of industries and market segments impacted by innovation has increased significantly which is in part how the industry is able to successfully absorb a five to six times more capital each year than it did 20 years ago. Finally, the company building tactics employed by the companies we back have changed (product development practices, sales and marketing strategies, and approach to global markets are three areas that immediately come to mind, but this is a whole separate topic), including specifically on the investment side where there has clearly been a major shift in how companies are financed, whether it be at the startup phase and prevalence of small seed rounds, or at the later stage where the small IPOs of 20 years ago noted above have been replaced by the $50+M late stage private financing at significantly higher valuations.
My conclusion: venture capital has indeed changed in fundamental ways in the 20 years I have been fortunate enough to be in the industry, but what makes for a good venture capitalist and what makes for a good investment opportunity has not. I feel fortunate to have worked with as many creative and talented founders over the years and look forward to doing so for the next 20!