Venture capital has remained virtually unchanged for decades. But, we’re on the cusp of a dramatic shift in its evolution. While Covid-19 affects what industries get more or less investment dollars right now, other trends began to surface well before the pandemic. To understand where venture capital is headed, let’s first look at how it got to where it is today.
The start of venture capital
When Georges Doriot founded the first venture capital investment firm in the 1940s, his vision was to open up a new source of funding for war veteran entrepreneurs, rather than solely relying on a few select, rich investors. By allowing more people to invest in startups and private companies, Doriot opened up the possibility of new business creation and wealth generation for individuals in a never-before-seen way. It’s an interesting story and, for more historical context, you should check out our brief history of venture capital.
Unfortunately, this vision was never fully realized and venture capital fell back into the hands of the elite, who, having seen early successes, took to investing in startups with a new fervor. Today, it’s even more pervasive in the upper echelon of society and, for actors, pop stars, athletes, and tech millionaires alike, venture capital is a popular investment strategy for the rich to turn their thousands into millions and millions into billions. Sadly, this risky, but lucrative game has been kept out of reach for the majority of people. Until now.
Democratizing venture capital
Venture capital is ripe for disruption. The SEC, which is the governing body for venture capital-type investments, already set things in motion to change the rules of the game when they created a new type of investor. The introduction of the ‘sophisticated’ investor opens up startup investing to the majority of Americans for the first time in history. No longer do startup investors have to meet salary or net worth minimums to become an ‘accredited’ investor. To become a ‘sophisticated’ investor, you simply need ‘sufficient knowledge’ that shows you understand how startup investing works.
How does venture capital work?
It’s coming to light that to be a successful startup investor, you don’t need to have some special ‘shark’ sixth sense to sniff out the golden opportunities. It’s all about diversification. If you understand how startup investing works well enough and can evaluate opportunities to find an array of high potential companies, then investing smaller amounts across a larger pool always outperforms investing a lot of money in a select few. Arming people with this knowledge can change the face of venture capital forever. If you’re interested in getting in on the game and catching this wave of opportunity early, you should check out our post about how to learn startup investing and become a venture capitalist.
The future of venture capital
So, where is venture capital going? Arguably for the first time since the 1940s, venture capital is truly changing. We’re going to see a new game with new rules in a post-Covid-19 world.
Right now, under the belt-tightening pressure of Covid-19, 75% of venture capitalists and VC funds say they’ll slow down investment and very few are investing in new industries. However, while industries like travel, food, and retail are suffering, others – like healthcare tech, delivery services, and gaming – are booming. So, it’s apparent (and intuitive) that venture capital investments are ever-changing and driven by socioeconomic trends.
An overall decrease in VC funding long term is highly unlikely but, with a temporary drought (or fear of one), startups will start looking for alternative sources of funding more than ever. Before Covid-19, many founders were already disgruntled with the existing venture capital model, which often pressures startups to take on exorbitant amounts of money (often more than needed) at inflated valuations. To what effect? Seemingly, just to raise eyebrows, turn heads, and compete with the reputations of those that came before them. The pressure doesn’t stop there, with many startups pushing towards unsustainable growth in order to satisfy starry-eyed investors looking to turn their investments into the new unicorns on the block. This growth often comes at the expense of what’s good for the company (WeWork is a recent example of this).
This disillusionment has been encouraging entrepreneurs to say ‘no’ to the status quo and consider alternative funding options. The rise of micro-funds and equity crowdfunding, which is when numerous investors fund a company via smaller investment amounts, is evidence of this. However, consideration of alternative funding and investment options is in its early stages and venture capital funds still have a stronghold on how the industry works. What’s more, trends point to existing funds continuing to consolidate into mega-funds, despite VCs and founders recognizing the problems with these mega-funds that often invest too much too fast.
An optimistic outlook: opportunity in a downturn
Despite existing and new challenges in the world of venture capital, many have an optimistic outlook for the future. Experienced VCs know that this moment is also an opportunity. Some of the most resilient startups are launched during times of struggle and those who keep their eyes open to innovation in a downturn will enjoy its opportunistic returns. Fun fact: did you know that Uber, WhatsApp, Venmo, and Instagram are just a few of the startups that launched during the 2008 recession and went on to be wildly successful companies?
So, if you fall into the trap of thinking the world is grinding to a stop, think again. We can all learn from the venture capitalists who came out on top with their forward-thinking investments during the last recession, and the resourceful, creative entrepreneurs they invested in. The more people who have the opportunity to invest in the early stages of a company, the more likely it is we create wealth for those who are not already in the top 1%.
Entrepreneurship is still alive and well. Countless industries and businesses have already proven that they can pivot, adapt, and innovate during the Covid-19 crisis – whether it’s shifting production to more relevant products, taking their businesses entirely remote and online, delivering instead relying on foot traffic, and finding other ways of shaping their operations to meet immediate needs.
Now, it’s more important than ever for the majority to learn how to invest in our future. At Doriot, we believe that opening up the world of startup investing to all is the path toward a more abundant future. A recent Forbes article said it well:
“Above all else, we must not lose sight of our purpose: to nurture and grow innovative and creative early-stage businesses to deliver to their true potential in the post-COVID world.”