VC industry changing due to new platform – death or life?
Recently, I have read a very interesting article that continuous my argument that aside from many sectors the financial sector is also changing rapidly due to digitalization. The author states that:
“In my life, I have been very fortunate to chronicle the emergence of the commercial internet (as we know it) from its early days. Over next decade or so, I came to realize the amazing deflationary powers of the internet. It was — and still is — a great deflator, squeezing out middle men, friction and of course, profits.”
The author argues that the next wave of change will affect the way businesses raise venture capital. Intransparencies will be broken open by Angel List and other fundraising platforms that force a secretive VC industry to differentiate their offerings beyond the initial cash injection. While I agree with the broad thesis of the argument I would highlight two aspects that seem to be overlooked frequently.
As previously reported the VC industry as a whole does not generate positive returns. It is an assets class where only very few firms make money. These firms generally are not “smarter” than others but have a strong PR function and therefore get more deal flow than the other industry participants. If platforms now “socialize” deal flow and every investment is instantly shown to the entire industry then the professional selection becomes even less important. An automated investment distribution among Angel List offerings based on a set of pre-determined criteria would probably beat the returns of most VC firms and would require minimal direct investment attention. This would not alter the VC industry but give it the last punch in its current death struggle.
Secondly, the start-up market is now becoming an asset class that is open to the broad public. Crowd funding platforms and projects like kickstarter are already expanding the available investor base. In my opinion, this is not a positive development. Start-Ups as an asset class are much to volatile and hard to read – if professional VCs cannot create a substantial return – how can private investors do so? These platforms are setting 99% of private investors up to lose all their money invested in this asset class.
In addition, there are just a lot of businesses out there that do not deserve funding. The current funding market is a Darwin based system that kills of a lot of bad companies prior to raising capital. If the investor and funding base is now drastically increased we will see more and more zombie start-ups that live much longer than they should based on a “stupid-money” infusion through crowd funding platforms. If you look at the quality of start-ups coming out of places that received a large cash infusion (e.g. Berlin in Europe) you see so, so many ideas that should never have been funded but are now raising funds because way too much money chases too few good ideas.
Crowd funding and platforms like Angel List will significantly disrupt the VC industry but it remains to be seen if this is positive or negative for start-ups and investors alike.