There is an old saying that the VC’s in Silicon Valley will only invest in companies less than an hours drive from their office. This highlights the personal nature of the startup investment world. Investors want to be very hands-on with their portfolio companies. This is a model that has been replicated all over the globe. However, the internet is transforming every industry and it is slightly ironic that the investment community has been slow to embrace the technology they invest in. Platforms are starting to have a profound effect as they dis-intermediate some of the current players.
Venture Capital funds are under pressure from investors due to their high management fees and lack of accountability. Investors in VC funds are only in a position to judge performance after an extended period of up to 10 years. Such funds are becoming more vulnerable to competition. VCs are increasingly moving later stage with each new fund they raise. As funds grow larger, their managing partners gravitate towards making a smaller number of investments. This allows them to deploy their resources more efficiently over a a manageable number of portfolio companies. This is opening up a gap below Series A which will increasingly be filled by platforms.
At the lower end of the scale, Crowd-funding platforms are already having a major impact. In some countries such as the UK this is combined with strong government incentives for smart angels to invest on an individual basis. This provides an alternative to the friends and family round. At slightly later seed rounds, professional funding platforms such as Dreamstake are nibbling at the VC space by facilitating syndication. This is already transforming the industry, with Angellist raising over $100 million for startups on their platform in the last year.
Naval Ravikant, the founder of Angellist is not going to stop at simply syndicating angels. He has his eyes on the larger institutional investors that cannot currently invest in early stage startups because the transaction costs are too high. However, platforms can effectively manage portfolios on behalf of these global giants.
Platforms have the potential to reduce transaction costs and bring efficiencies into the market. They allow startups to attract individual investors directly into online deal-rooms with standard term sheets. This simplifies the investment process and avoids heavy management fees.
To summarise, VC funds face competition from individual angels investing in syndicates on platforms and from larger institutional investors who will use the same platforms to reduce transaction fees and make investing in high growth opportunities more accessible to them.
Blog by Paul Dowling – Co-Founder of Dreamstake the world’s first tech startup platform to match founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders can create profiles on the platform and get direct introductions to investors. We are constantly looking for great early stage tech startups. Investors please contact [email protected]
We have also recently launched an exclusive tech angel investment club in partnership with The Hoxton. HoxTech Angels will run invitation only angel investment evenings every last Monday of the month.