Venture Capital 3.0

Software and internet focused investing is not dead. It’s barely started.

By Keith Teare • Issue #268 • View online

Sam Lessin writes a really good piece on the end of venture capital as we know it. But it is not the end of venture capital as we know it. It’s the end of the second act. 3.0 coming up.



Sam Lessin is a clever man. I guess there is no news there. This week’s top story shows this in two ways. Firstly his headline is clever — predicting the end of venture capital is clearly a must-read. And secondly, his thesis is clever.

Now, firms that grew up around software and internet investing and consider themselves venture capitalists face a choice.

They can become just “capitalists” (drop the venture) and engage in direct and cutthroat competition with larger East Coast and global institutions to offer cheaper and cheaper capital. Or they can stick to their roots and move on from the increasingly tame world of software and internet investing to wild new horizons. (Think biotech, new parts of artificial intelligence and much more.)”

Not completely right, however. Later stage money is industrializing what used to be called venture capital. In previous weeks we have spoken about Tiger Global, Coatue, SoftBank, and others. And Sam is right that the big money is coming and fast. He is also right that small venture firms will not be able to compete with the big money for speed, price, or size of the check.

But I believe Sam is wrong to associate this with the end of investment in software and the internet.

The net takeaway is that in the last several years, as software investing has gone from fringe to mainstream, enormous flows of global capital have been unlocked to finance software and the internet at increasingly competitive rates.”

The real process underway (using the same set of facts) is the rise of the seed asset class and the growth asset class and the shrinkage of the traditional venture asset class.

Today there are over 3000 seed-stage funds in the world and over 350 in the Bay Area alone. These funds account for the lion’s share of investments in future unicorns. Their successes are quickly embraced by growth-stage investors. The companies that fail to make the grade either die or become “zombies”. There is a shrinking space where a venture fund can enter in the middle of this process and expect good returns.

Venture investing at the mid-stage is a dying art, but more capital than ever is flowing into software and internet companies early stage. This trend is a consequence of the shift to traction-based investing in the early to late 2010s. Once traction became a requirement of an A round most venture investors stood back until it was evident. This left a huge space in the early stage for new funds to emerge. Funds like SV Angel, Y Combinator, Plug and Play, Box Group, Funders Club, Founder Collective, Harrison Metal, Great Oaks, Boldstart, Seedcamp, Slow Ventures, FJ Labs, Soma, Lowercase, Tuesday, PointNine, LocalGlobe, Haystack, K9, and others are doing very well in the space previously occupied by venture investors.

And it let companies get big enough for the growth investors to enter early. Leaving less and less space in the middle.

Alongside the rise of Tiger Global style investing, the rise of professional angels and seed-stage funds is the real big new trend, but that area of investing is now also subject to change.This week we cover the announcement of Allocations:

a fintech startup building software to help smaller private equity funds form and operate, announced that it has raised a $4 million round at a $100 million valuation.”

This is an attempt to marry seed-stage funds with crowdfunding, where special purpose vehicles (SPVs) pool capital from angels and others and seek investments into the best early-stage startups. The investors still need to be accredited.

My take? Seed-stage investing is the most interesting field for fintech innovation. Capital allocation at scale into the seed stage will produce returns that dwarf normal venture returns. In that sense Sam is right, venture is dead. But seed-stage investing in software and internet companies is not. Done right, this is where the lion’s share of future value will be created.

Sam’s options are to go big and try to compete with the growth players, and probably fail, or focus on niche areas where big capital is yet to play. Both are doable. But a better option is to figure out how to be in the best seed-stage startups in partnership with the new venture investors who play there.

More in this week’s video

Venture Capital 3.0

The End of Venture Capital as We Know It

All signs seem to indicate that by 2022, for the first time, nontraditional tech investors — including hedge funds, mutual funds, and the like — will invest more in private tech companies than traditional Silicon Valley style venture capitalists will.

Many people are quick to write this off as a momentary blip where extremely cheap money and the global search for returns are awkwardly pushing all investors toward the private innovation markets; however, that read misses the main point. • Share

Venture capital probably isn’t dead — TechCrunch

Venture capitalists are chatting this week about a recent piece from The Information titled “The End of Venture Capital as We Know It.” As with nearly everything you read, the article in question is a bit more nuanced than its headline. Its author, Sam Lessin, makes some pretty good points. But I don’t fully agree […] • Share

Innovation in Venture Models

Allocations sees a world where myriad, smaller private equity funds are the norm

This morning Allocations, a fintech startup building software to help smaller private equity funds form and operate, announced that it has raised a $4 million round at a $100 million valuation. The startup also shared a host of performance metrics, including that it reached a $4.6 million revenue run rate in June, and a $6 […] • Share

LPs make most of the money from VC funds. So who are they?

When Katie Jacobs Stanton and Alex Roetter unveiled their firm Moxxie Ventures’ second fund, they weren’t the only names attached to the announcement. Instead, the VCs made a deliberate decision to also disclosethe people who had invested in the fund itself: big names like Anne and Susan Wojcicki, Laurene Powell Jobs’ Emerson Collective and Goldman Sachs Asset Management.

“As both of us transitioned into the VC world, we’re somewhat surprised with how opaque many things are, including the sources of capital,” said Roetter, the former Twitter exec and Kitty Hawk president who joined Moxxie as a general partner of its second fund. “We just thought it was a no-brainer to report on something if you say it’s important to you.”

Venture capitalists have long kept the names of their backers a tightly guarded secret. • Share

Companies Going Public in 2021: Visualizing IPO Valuations

Tracking the companies that have gone public in 2021 so far, their valuation, and how they did it.

The post Companies Going Public in 2021: Visualizing IPO Valuationsappeared first on Visual Capitalist. • Share

Latin America’s Herd Of Unicorn Startups Multiplies

Startup investors have been putting a whole lot more capital into Latin America for the past couple years. Now they have something to show for it: A large and fast-growing stable of unicorns.

At least 23 private Latin American companies have now crossed the $1 billion valuation threshold, per an analysis of Crunchbase data. Collectively, they’ve raised over $15 billion in sectors ranging from fintech to food. We put together a list of them below:

What’s remarkable about this list is how different it would have looked just a year or so ago. That’s because much of the funding activity, along with the surging valuations, are relatively recent. • Share

Apple crosses the privacy line

Apple says it will begin scanning iCloud Photos for child abuse images — TechCrunch

Later this year, Apple will roll out a technology that will allow the company to detect and report known child sexual abuse material to law enforcement in a way it says will preserve user privacy.

Apple told TechCrunch that the detection of child sexual abuse material (CSAM) is one of several new features aimed at better protecting the children who use its services from online harm, including filters to block potentially sexually explicit photos sent and received through a child’s iMessage account. Another feature will intervene when a user tries to search for CSAM-related terms through Siri and Search.

Most cloud services — Dropbox, Google, and Microsoft to name a few — already scan user files for content that might violate their terms of service or be potentially illegal, like CSAM. But Apple has long resisted scanning users’ files in the cloud by giving users the option to encrypt their data before it ever reaches Apple’s iCloud servers.

Apple said its new CSAM detection technology — NeuralHash — instead works on a user’s device, and can identify if a user uploads known child abuse imagery to iCloud without decrypting the images until a threshold is met and a sequence of checks to verify the content are cleared. • Share

Where your news comes from

Ranked: America’s Most Searched and Visited News Sites by State

American states have some key differences for their favorite news sites. Here’s how they rank by monthly visitors and state popularity.

The post Ranked: America’s Most Searched and Visited News Sites by Stateappeared first on Visual Capitalist. • Share

Internet 3.0

Federal Reserve governor says private stablecoins are likely better than CBDCs

In a speech before the American Enterprise Institute on Aug. 5, Federal Reserve governor Christopher Waller expressed doubt about the touted benefits of a central bank digital currency (CBDC).

“I remain skeptical that a Federal Reserve CBDC would solve any major problem confronting the U.S. payment system,” said Waller. He cited a fairly free market principle as his rationale:

“In general, the government should compete with the private sector only to address market failures. This bedrock principle has stood America in good stead since its founding, and I don’t think that CBDCs are the case for making an exception.”

Instead of a Fed-issued digital dollar, Waller seemed to cautiously promote advancements of the private sector, specifically stablecoins. Waller noted that private stablecoins may well provide the competition to the banking sector’s mark-up on digital payment that advocates of a CBDC advertise.

The post Federal Reserve governor says private stablecoins are likely better than CBDCs appeared first on The Block. • Share

JPMorgan Starts Offering In-House Bitcoin Fund to Private Clients

JPMorgan Chase has started to pitch an actively managed Bitcoin fund to its wealthy private banking clients from earlier this week, according to a report by Coindesk.

Though the bank did not confirm anything on the new cryptocurrency product, the crypto-focused publication cited two anonymous sources to confirm the report.

JPMorgan CEO Jamie Dimon remained one of the harsh critics of Bitcoin. He even compared the digital currency to the Dutch tulip bulb bubble and called it a ‘fraud’. Though his stance towards Bitcoin did not change, he indicated that his bank’s clients are surely interested in investing in crypto. • Share

Uruguay senator proposes bill to classify Bitcoin and other cryptos as ‘legal tender’

A senator in the Uruguayan parliament, Senator Juan Satori has joined the league of politicians supporting Bitcoin as he recently introduced a draft bill that proposes the regulation and enablement of the adoption of crypto payments by businesses.

The post Uruguay senator proposes bill to classify Bitcoin and other cryptos as ‘legal tender’ appeared first on CryptoSlate. • Share

Venezuela Will Launch ‘Digital Bolivar’ in October

In brief

  • Venezuela launched a cryptocurrency known as the Petro in 2018.
  • It’s now set to put a central bank digital currency into circulation.

Venezuela’s currency will be getting a new look, in more ways than one, as the government tries to simultaneously tame inflation and institute monetary sovereignty.

The Central Bank of Venezuela said today that it will be putting the digital bolivar, first announced in February, into circulation on October 1. The information was first posted to the Bank’s social media accounts and confirmed later on thewebsite of the People’s Ministry of Economy and Finance. • Share

China Crisis

An in-depth look at the political motivations behind China’s tech crackdown, as Xi pursues progressive authoritarianism at the expense of international capital (Bloomberg)

After 40 years of allowing the market to play an expanding role in driving prosperity, China’s leaders have remembered something important — they’re Communists.

Xi Jinping smiled and hinted at a policy bombshell that would soon roil stock markets from Shanghai to New York.

It was mid-June, and the most powerful Chinese Communist Party leader since Mao Zedong was holding court at an after-school club for elementary students in the remote city of Xining. Acknowledging the growing pressure on students and their parents to spend time and money on private tutoring, Xi promised to ease their burden.

“We must not have out-of-school tutors doing things in place of teachers,” he said. “Now, the education departments are rectifying this.” • Share

Policy and Cash

How Google quietly funds Europe’s leading tech policy institutes

A recent scientific paper proposed that, like Big Tobacco in the Seventies, Big Tech thrives on creating uncertainty around the impacts of its products and business model. One of the ways it does this is by cultivating pockets of friendly academics who can be relied on to echo Big Tech talking points, giving them added gravitas in the eyes of lawmakers. Google highlighted working with favourable academics as a key aim in its strategy, leaked in October 2020, for lobbying the EU’s Digital Markets Act — sweeping legislation that could seriously undermine tech giants’ market dominance if it goes through. Now, a New Statesman investigation can reveal that over the last five years, six leading academic institutes in the EU have taken tens of millions of pounds of funding from Google, Facebook, Amazon and Microsoft to research issues linked to the tech firms’ business models, from privacy and data protection to AI ethics and competition in digital markets. While this funding tends to come with guarantees of academic independence, this creates an ethical quandary where the subject of research is also often the primary funder of it • Share

Startup of the Week

A Good Story Always Wins-Robinhood’s IPO Pivot

A Good Story Always Wins — Robinhood’s IPO PivotThe app sticks to its story by defying Wall Street traditions.Image Credit: Sergei Tokmakov

Staying true to the legacy of its namesake outlaw hero, Robinhood reallocated shares, traditionally reserved for institutional stalwarts, into a halo of beaming retail investors, still bedazzled from the virtual confetti that the app sprinkled on them. In defiance of Wall Street tradition, Robinhood sold as much as 25% of its shares to retail investors who traded on its app.

As the Wall Street Journal explained, “for all the sway that amateur investors have over meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc., they have been largely shut out of the IPO party. Companies tend to allocate well under 10% to individual investors, according to brokers, and much of that supply is gobbled up by banks’ wealthy, well-connected clients.”

There is a story we tell ourselves when we gravitate towards a brand. This story is influenced by what the brand tells us to tell ourselves. The landscape of the narrative is unlimited — it can talk about how the brand solves a problem, while daring to venture inside ours heads by alluding to internal problems or goals. In his book Building a Story Brand, Don Miller wisely notes that companies tend to sell solutions to external problems, but people buy solutions to internal problems. • Share

Robinhood is now a stonk

The wild swing in the price of Robinhood today appears from our vantage point to be another stonk moment. • Share

Robinhood’s Dismal Opening Is a Telling Sign

The stock market may be at record highs, but there were plenty of red lights flashing today. The most glaring of these would have to be the dismal opening day performance of Robinhood, the company most obviously associated with the post-Covid bull market. After pricing at the bottom end of its preliminary range, the stock fell sharply shortly after it opened — and finished the day down 8.4%.

That’s not a bad outcome for Robinhood’s early shareholders, given that this time last year the company was raising money privately at less than half even today’s depressed price (see this story from The Information on how major VCs will fare). That said, Wall Street’s tepid reaction to the IPO suggests skepticism about Robinhood’s business model, which is based on encouraging average people to buy stocks — even if they’re clueless about what they’re buying (AMC, GameStop). That is the embodiment of the dangers of a market where shoeshine boys give you stock tips, as the famous line goes. • Share

Tweet of the Week

Two-year-old events start-up Hopin boomed in the pandemic. Now it’s a $7.75 billion business

Virtual events start-up Hopin had only eight employees in March 2020; its headcount now stands at 800. • Share