In a turning of the tables, VCs recently took the stage before a “Dragons’ Den”-style panel of entrepreneurs to pitch for themselves.
The event was held by Innovate Finance, part of a series of events complementing London Tech Week, as Innovate Finance reports. “Could it be time for disruption in an industry that specialises in spotting disruptors?” the organization asked.
#IFWeek #fintech VC Reverse Pitch Day at @Level39CW off to a great start with a full house! pic.twitter.com/kVEOS3d43d
— Lauren Dickerson (@ledickerson) June 18, 2015
Innovate Finance writes,
Global investment by VCs has risen at an unprecedented rate in recent years. London-based companies raised a record $682m in VC funding during the first three months of 2015, more than the entire amount raised in 2012. It is clear that these are good times for VCs, judging by the comfortable and relatively uncompetitive pitches that the VCs delivered as well as the swarms of entrepreneurs that surrounded them once the event had wrapped up.
While each of the VCs onstage brought something unique to their pitches, none of them mentioned their competitors, as Louise Beaumont, head of public affairs and marketing at GLI Finance, noted. Does this speak to their confidence–they know that they will always attract startups, regardless?–or perhaps because they don’t consider other VCs to be their competition?
Ultimately, VCs aim to support the ecosystem, said Nicolas Sharp of Passion Capital; over 50 percent of Passion Capital’s investments are collaborative. Infocomm’s Zach Tan also noted that VCs quite often fund the same startups and, in doing so, complement each other by offering different skills and experience to the startups they work with. His statement was similar to Alain Falys’ later call that VCs need to contribute skills to the business.
Innovate Finance writes, however, that this ideal isn’t always the reality. It notes that VC firms frequently outbid each other to jump into startup deals, which is part of the reason why tech firm valuations have shot up so high in recent years. In addition, VCs have new competitors: alternative funding sources.
Another theme discussed was how the seed stage of startups is increasingly vulnerable to disruption–in particular, by angel investors. In the U.S. alone, according to Innovate Finance, there are over 300,000 active angel investors, and you can look for that number to increase, since firms can now seek funds on social networks for founders and angels, such as AngelList. More and more, startups launch through crowdfunding platforms, either through equity crowdfunding or by raising money for pre-sold products.
For a global perspective, according to Massolution global crowdfunding experienced unprecedented growth in 2014, expanding by 167 percent to reach $16.2 billion raised, up from $6.1 billion in 2013. This is set to increase to $34.4 billion in 2015, surpassing VC which averages roughly $30 billion per year.
Equity platforms in particular threaten VCs, since the platforms encompass both angel investors and VCs. The latter experience trouble with scaling, as they can’t scale as quickly or effectively as crowdfunding platforms can. As Innovate Finance notes,
Adding partners to a VC firm tends to reduce returns. The more people you put around the table, the more risk-averse you get and, as a result, VC growth is fairly limited.
On the other hand, equity crowdfunding platforms have seen growth worldwide.
In addition, VCs face disruption at the opposite end of the financing spectrum, during the late stage. In what has basically become a private IPO, large institutional investors provide high-growth startups with much of their funding. And for tech firms, citing CBI insight, private IPOs now outnumber public ones.
This competition at both ends of the funding spectrum has the effect you’d expect on smaller, somewhat weaker funds. Increasingly connected startups, able to discuss online or at conferences their experience with different VCs also exacerbates the pressure on such funds. And on top of that, many startups would answer “Everything!” to the question “What’s in a name?” when it comes to the significance of VC name and reputation.
Ironically, the fintech industry in which VCs are eager to put their stakes is priming VCs themselves for disruption. That said, VCs aren’t going to disappear; consider the sway VCs still have in the startup and series A investment space.
In the end, for VCs to stay with it, Innovate Finance says,
they will have to ensure that they are able to offer startups a better deal than their VC competitors as well as crowdfunding platforms, angel investors or institutional funds.