A VC expert explains 3 inevitable forces rebooting venture capital right now
- Lisa Calhoun is founding general partner at Valor.VC, an early-stage venture capital firm headquartered in Atlanta, Georgia.
- She says that venture capital is poised to become more financially productive, more geographically decentralized, and more inclusive going forward.
- Three trends are driving this change: a refocus on seed stage investing, a shift to locations outside Silicon Valley, and a prioritization of backing diverse entrepreneurs.
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There are three forces rebooting venture capital right now. As founding general partner at Valor.VC, a "first-check-writing" venture capital firm in Atlanta, I can feel the tug of the current perhaps more readily than my colleagues mired in Silicon Valley's 800+ venture capital firm density. From our vantage point, we feel the urgent need for innovation from corporations, see the rising waves of talented people creating it from universities like Georgia Tech, Morehouse, and Spellman, and swim in the currents of the largest-ever private capital market. It's pressurizing a new venture capital.
Venture capital is poised to become more financially productive, more geographically decentralized, and more inclusive - all at once. Here are three forces driving that change:
Seed stage drives pulse for venture capital returnsIn Silicon Valley, seed investing is something done pre-product and pre-revenue. Not so in the rest of the country, where 80% of seed deals actually originate.
The first institutional round is arguably the most fascinating round in venture capital. It may also be the only one you've never heard of. It's often flagged as a Series Seed, but no matter what you call it, its distinguishing characteristic is a first valuation set on the startup by a third party, usually a venture capital firm. Those first valuations start the clock ticking on returns for investors - and the founding team. By having a valuation, the company now can do things with its newly minted stock, like take out lines of credit or incentivize team members with options. This little known round packs a powerful punch at an increasingly competitive price point, and it's a very different "deal" outside Silicon Valley versus inside.
The trend is that first institutional rounds are down for five straight years, and not just by a little.
It's interesting to investors because seed stage investing - those first institutional rounds - have provided the bulk of historical venture returns; 74%, according to analyst Cambridge Associates in their report, "Venture Capital Disrupts Itself." Yet Pitchbook estimates only about 7% of venture capital is focused on seed-stage investing now.
Rob Go at Nextview estimated that only about one in six seed firms actually lead rounds. Valor is one of the few firms that, like Nextview, is focused on leading first institutional rounds. It's the least competitive round in all VC and it's also the one most likely to generate outsize returns, historically.
Markets hate imbalance. While headlines claim "peak venture" on valuations, at the earlier stages, it's more like the pits. We're on the slopes of a steep valley in the number of opportunities startups have to get a first valuation. New investors are emerging, like Valor, with the platforms and the appetite to fill the gap in financing. As this happens, venture capital value creation is shifting from historically where it has resided, with Series A firms, to those firms writing first checks at first valuations - a cadre of high conviction first institutional round funders.
New places competing for venture capital's next HQSeed stage is no longer a Silicon Valley experience. 60% of venture capital deals are not done on the West Coast. That number goes up when you focus on seed rounds.
According to Valor's latest research, states like Maryland, Georgia, and Arizona are outpacing California in the acceleration of seed capital deployment. So while there's a legacy of institutional capital flowing to West Coast firms, many are not well-positioned now for the future of venture capital - at least, not if you define venture capital as the asset class that invests professionally in young companies.
Early movers like Andreessen Horowitz, Softbank, and Foundry Group are canaries in the coal mine here, refocusing on being financial advisories and not tagging themselves as VC firms. This de-Valleyization is a driver in the reboot of venture capital going on right now. So where's the next headquarters of true first round capital? It's up for grabs - Atlanta is definitely on the map, and it's exciting times.
New faces driving innovationSpeaking of that, as venture capital decouples from Silicon Valley at the earliest stages, new faces are emerging as the go-to entrepreneurs with next-level innovation. The US is on track to becoming a majority minority country in 2045. It's already 2045 for venture capital. Why? Many of the urban areas that produce top startups have already made the transition. For example, Austin's white population is less than 50%. Same in Los Angeles. In Atlanta, the white population is 37%. In Baltimore, 28%. Houston? 25%. You see the trend.
The business of venture capital is investing in the next big tech-driven trends - by demographic necessity, these can't be "white led" strategies. Today, the majority of venture capital is deployed by white male investors to white-male-led teams. In order to generate top returns, this won't last. As venture evolves and maintains the need to invest in the best of new opportunity, investors will increasingly deploy capital to innovations coming from diverse founders. At Valor, 60% of our portfolio is led by underrepresented founders like women and people of color. Among the Kauffman Fellows program, the elite venture capital educational program, the newest class is 50% people of color.
Three trends driving big opportunitiesAs these large financial and demographic trends work themselves out, investors who adapt before consensus stand to be rewarded. New entrepreneurs, including today's underrepresented founders, have exciting strategies that come from fresh insights. Valor.VC invested in The Gathering Spot - a breakout model with legs in DC, LA, and Atlanta that's re-inventing co-working, membership clubs, and studio-based media through the creativity of co-founders Ryan Wilson and TK Petersen. We invested in SmartCommerce, led by CEO Jennifer Silverberg, which helps brands increase sales despite an increasingly dis-intermediated shopping experience. They're working with 29 of the top 30 international consumer product good brands - companies like Proctor and Gamble, Mondelez, and Keurig/Dr. Pepper.
And finally, I'm encouraged by the energy of the disconnect in venture capital. When you see a clear line like the downward trend in first institutional rounds, you know the trend cannot remain. The vacuum in first institutional rounds is unsustainable for our financial markets. All three of these trends say the time is ripe to reset your investment approach in venture capital.
Lisa Calhoun is founding general partner at Valor.VC, an early-stage venture capital firm headquartered in Atlanta, Georgia. Her thoughts on innovation have been featured in Wired, Inc., the Kauffman Fellows Journal, and Forbes.