10 Feb What's Next for Venture Capital?
That’s an odd statistic, given that so many start-ups report difficulty raising venture funds. In our Entrepreneurship Survey, run concurrently with the Venture Investment Survey, 55 percent of respondents said they had not raised outside capital, and of those who had done so only 39 percent of respondents said they had raised institutional venture capital. More likely, today’s tech start-ups get their capital from individual “angel” investors (59 percent).
But here’s an interesting twist, and a statistic that may suggest the venture overhang won’t change much in the months ahead: 72 percent of responding entrepreneurs answered “yes” when asked if they would prefer to finance their companies without institutional venture capital investment.
This number throws itself open to a variety of speculative interpretations, yet the tenor of this and other survey responses reveals a growing dissonance between the entrepreneur and venture communities. In the surveys’ five years, the tension between these symbiotic organisms has simmered below the surface; this year it has bubbled over.
It was this very bubbling that I discussed with Patrick Yam, an economist, professor, and founder of Sensei Partners, late last year. Yam contends that institutional venture capital, as we’ve known it for the past half-dozen or so years, is undergoing a “back to the future” shift away from early-stage investing to growth-stage capital. Such a shift, which Yam demonstrates with graphs and flow charts, opens a gap in what he calls the “value chain of investing.” As experienced venture investors shift their capital to later stage, entrepreneurs are left to their own devices to build a company from concept to proof. The gap leaves infant companies in need of experienced business mentoring and facilitation once provided, at least in concept, by early-stage venture investors. No doubt, it is the gap — or more accurately the vacuum of this gap — that is causing the odd Push-Me-Pull-Me tension between VC and entrepreneur revealed in our survey.
Interestingly, venture and entrepreneurial interests have not followed the same path of shakeout and recovery, and they certainly have not taken it at the same rate. In fact, the venture community may be as much as 6 to 12 months behind the entrepreneurial curve. Start-ups are beginning their march back before venture has fully hit the bottom. This creates a very different start-up and investing environment that will persist for some years to come. Entrepreneurs, unable to raise institutional money in their early stage, are building companies through force of will and the kindness of friends and family. As this generation of companies grows to and beyond first customer revenues, venture will play the role of growth catalyst rather than value creator.
In the throws of this transformation is immediate discomfort — this dissonance is so clear in this year’s early survey results. Ultimately, though, this role transformation will support a next-generation market growth that is based on solid and proved business and business practice. And that is goodness.
Each year, DEMOletter surveys venture investors and entrepreneurs in two surveys to understand their perspectives as they invest in and build information technology businesses, and to compare and contrast the perspectives of start-up executives and their investors.
These survey of only 20 questions should take you no more than 10 minutes to complete, and your answers will help you and your colleagues get a clearer picture of the technology start-up and venture market today.
To take the Fifth Annual DEMO Entrepreneurship Survey, go to:
To take the Fifth Annual DEMO Venture Investment Survey, go to: