The 2014 has been a great year for startups and startups fundings. The year started with Facebook’s announcement of its $19 billion acquisition of WhatsApp, in what remains the highest price ever paid for a startup. The months that followed saw Slack receiving a $120M fundraiser led by Google Ventures and Magic Leap having a massive $542 million round in October. The list goes on with
Facebook also purchasing Oculus, Google buying Nest Labs, and Apple obtaining Beats all in multi-billion dollar transactions.
What is happening? The concern about these companies being overpriced or overestimated is for sure an issue, but as the cake gets bigger how do AngelList and other private investors collocate themselves into this scenario?
The famous fundraising website AngelList is not merely standing and watching as their largest investment ever made shows: 2,7 M led by Gil Penchina’s syndicate. This is truly a new world for VCs. While AngelList’s presence has certainly not gone unnoticed in the venture world, its effect has been most immediately felt by angels themselves in seed rounds. Until now, the platform’s round sizes were simply not at a scale where early-stage investors had to spend much time considering the platform or how they might fight it competitively.
Many firms thrive on investments at a couple of million dollars, and these funds won’t just compete, but also with every large syndicate on AngelList. That is great news for entrepreneurs, but for traditional VCs, they have to find ways to adapt against this new onslaught of funding.
Even more than the early-stage changes, growth rounds of fast-growing companies are increasingly going to be effected by insiders, or more specifically, friends of the insiders. Venture capitalists are increasingly offering their limited partners the ability to invest directly in later rounds of their early-stage investments, giving them valuable exposure to growth while mitigating management fees.
If we have to make a single prediction about venture capital in 2015, it is that the gap between the very top venture capital firms and the rest of the industry will widen more than it is today. Top companies who can organize these sorts of easy growth rounds can promise unlimited capital to their entrepreneurs, eliminating the bane of fundraising for founders. That’s a heck of a selling point when the term sheets come in.
While this has obvious implications for founders, the wider effects are felt by everyday investors. A founder will almost certainly prefer to take dollars from a handful of private investors rather than submitting to the vagaries of the stock market. That investment inequality will rapidly accelerate in the coming year as the tools and contracts needed to manage this capital mature.
2015 is shaping up to be one of the most exciting years for venture capital. Top Silicon Valley companies will continue to impress their incumbency status on the industry as well. While perhaps we already started to see the changes these past few years, 2015 will likely be the watershed year where all these trends come together in the venture capital industry.