We advise entrepreneurs and investors in capital raising transactions using a tool box of new legal strategies, technology and business practices.
(This blog is based on an article by Jim Verdonik that was published by Triangle Business Journal in June 2019)
Some people ask us: Are venture and angel capital dead or dying?
No. Both are evolving to adapt to a changing capital raising environment – like dinosaurs that evolved into birds. New types of financings (like Crowdfunding and Coins) are a natural part of venture capital’s evolution.
Remember that venture capital wasn’t always like what we call it today:
- Modern VC funds evolved during the 1970s from what we today call family offices (for very BIG families – the Mellons, Rockefellers etc. – instead of investing for one family, VC fund managers put together their own group of institutions like insurance companies and pension funds.
- Modern VC funds were invented as a convenience for investors who wanted to focus on many areas, without building the infrastructure to support each type of investment.
A lot has changed since the 1970s. Most convenience service businesses today are being replaced or enhanced by software to solve problems. What are VC and angel problems?
The private equity industry is downsizing to smaller companies to compete with later-stage VCs.
Angel networks face burnout problems. The average angel in a network is old and stays active for between two to three years. Then, most angels stop paying attention and become AINO’s (Angels in Name Only).
The VC industry has never figured out how to invest efficiently. It takes too much time to evaluate potential investments and then monitor and assist portfolio companies.
The number of public companies has decreased dramatically over the past two decades. It isn’t cost efficient for companies to do small IPOs. So, both VC funds and angels are stuck in illiquid investments for longer time periods, which decreases annual rates of return.
But a lot of good things are happening on the VC and angel front. Organizations like family offices are playing a more direct role in making investments at lower fees and lower carried interest. Venture capital is returning to its roots.
Then, there is the democratization of venture capital, which includes:
- VC funds that raise $10 million or less can now have up to 250 investors, which allows VCs to accept smaller capital commitments.
- Venture managers are organizing online syndicates for followers who invest in special purpose vehicles (SPVs).
- Screen time is replacing face time. Software platforms that showcase investments allow angels to spend less time at in-person meetings, which is a major time drain.
- There is a younger generation of investors who are learning how to invest, because non-accredited investors invest online.
- Social impact investing is increasing – people redirect part of their assets to investments in businesses that are solving problems they care about.
- New investment funds that are making revenue share loans and adding sales and marketing support are earning VC annual returns. These revenue share funds try to make a little money from lots of businesses and don’t rely on one or two home runs to make their portfolios profitable. They also return money faster than traditional VCs.
Because of these trends, the number of businesses that receive funding are increasing and money is being invested in a wider range of industries. Businesses generally raise less money in each transaction, but big buckets of money are being replaced by conveyor belts that deliver money frequently.
The VC and angel world is evolving, not disappearing.
So, what’s your story? Are you evolving or disappearing?
Our goal is to help clients move to higher planes of existence and avoid the dustbin of history.
Contact us to find out how we can help you at:
| Jim Verdonik | Benji Jones |
© 2019 Innovate Capital Law (Verdonik & Jones, PLLC) For further information regarding the issues described above, please contact us.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.
