Investment in insurance technology, insurtech, is climbing fast. It’s going to have a big impact on insurance providers around the world. What is your strategy to stay abreast of the new opportunities and threats posed by insurtech?
Global investment in financial technology, fintech, continues to soar and insurance is emerging as its next big target market.
Investors around the world poured US$22.3 billion into fintech deals last year – a 75 percent leap from 2014. Insurance technology, insurtech, attracted around $2.6 billion of this outlay. This is still a small slice of total fintech spending but it’s a big step up from the previous year’s $800 million. And spending on insurtech looks set to surge.
In the first quarter of 2016 more than 45 insurtech deals were sealed, with funding totaling $650 million, according to researcher CB Insights. This is the most deals in any quarter and the second highest amount of investment for such a period. Insurtech firms that attracted funding included Oscar Health, Next Insurance, Lemonade and Slice Labs. Backing came from venture capital firms, private equity companies and the investment arms of big insurers.
Why the big interest in insurtech?
One of the reasons is that the fintech market is maturing. The illustration below shows that in the clamor for funding, early investment targets such as retail payments and merchant acquisition are being overtaken by new growth sectors, particularly retail lending and retail investments. Insurtech is fast-emerging as a new investment opportunity.
Another reason is that fintech investors realize that the insurance industry is ripe for disruption. With annual premium revenue of around $5 trillion and assets under management heading towards $15 trillion, the global insurance industry is a huge market. It lags other sectors, notably the banking industry, in adopting digital technology. Insurers need to up their spending on innovation to ward off rising competition and lure much-needed new customers.
The upswing in investment in insurtech firms will have a major impact on the insurance industry around the world. Expect a host of new arrivals to appear in the insurance industry in the next 12 to 18 months. Some of these firms will be marketing niche solutions to established carriers and brokers. Others will be looking to grab a slice of the insurance market by offering specialized insurance products and services built around digital technology. Bottom line…if you haven’t done so already, it’s time to make a proactive decision on how you will respond to insurtech.
In my next blog post I’ll discuss how insurers are responding to the insurtech boom and offer some suggestions you might consider in your strate
Some startup "unicorns" are magical, and others are donkeys in party hats. Illustration by Aleksandar Savic
AngelList paid out returns to nearly 200 investors.
When Dollar Shave Club sold to Unilever, investors came out of the woodwork to remind us of their role in the success. In theory you only get one of those per fund, so hey, why not, take that victory lap.
It’s much rarer for a venture firm to experience three billion-dollar exits in a matter of five months. That is, unless you’re AngelList. Through its various funds and syndicates, the crowdfunding platform can lay claim to Dollar Shave Club, Twilio, which went public in June, and Cruise, which sold to General Motors in March.
To be more specific, AngelList manages a few funds, including Maiden Lane, a $25 million fund operated by AngelList. That fund put money into Cruise and Authy, which sold to Twilio for stock in 2015. Meanwhile, in October last year, the venture arm of Chinese investment firm CSC Group launched a $400 million seed fund on AngelList called CSC Upshot. That fund invested in Cruise through a syndicate. In addition, two of AngelList’s additional “managed funds” invested in Cruise. And a group of AngelList investors (through a syndicate led by Mike Jones) backed Dollar Shave Club via a secondary stock sale in 2015.
To give AngelList full credit for backing the three of the most successful exits of the year, I had a few questions, which AngelList Partner Lee Jacobs answered, and I paraphrased:
Q: How many venture-backed companies raise at least
Guy Kawasaki is a Silicon Valley name that needs no introduction. He's been a leading voice in entrepreneurship and evangelism for years, beginning at Apple in 1983. As an adviser, author, investor, and marketer, Kawasaki has cultivated a unique perspective on what it takes to start a company. He's particularly adept at helping startups and early-stage companies get off the ground—and guiding them towards becoming well-known, successful businesses.
Kawasaki is always willing to share his advice for founders and aspiring entrepreneurs through his writing and speaking (including at Lean Startup Week this fall). Over the years, he's seen the good, the bad, and the ugly, and also uncovered many misconceptions held by new entrepreneurs about starting companies. We asked him to chat about what he's learned in his career, what's changed since he's started, and what today's entrepreneurs need to know to be successful.
Kawasaki's Golden Touch Given the impressive list of companies for which Kawasaki has worked over the years, you might think there's some complex formula or secret behind his success and influence. But in his mind, it's much simpler than that.
There's a section on Kawasaki's website that lists the various companies for which he's worked called "Guy's Golden Touch." Yet Kawasaki noted that "'Guy's Golden Touch is not 'whatever Guy touches turns to gold.' It's 'whatever is gold, Guy touches.'" This distinction is core to being a successful evangelist because, as he says, "it's easy to evangelize something great and it's very hard to evangelize crap."
Put simply: When he's deciding whether or not he wants to evangelize a product, he asks himself if he wants to use the product. In fact, Kawasaki joined his latest venture, Canva, because the founders of the graphic design software company saw he was a user and reached out to him. Not only does he look for products that he likes using, he looks for products that have the potential to make a difference.
He was drawn to Canva because he believed that "just as Macintosh democratized computing, Canva is democratizing design." By giving people a way to create graphics easily and without expensive, hard-to-use tools, Canva can "really make a dent in the universe" just as Macintosh has.
Rethinking the Fundraising Rat Race Not only is technology becoming more democratized but entrepreneurship is increasingly more accessible. With venture capital (VC) investments slowing down, one might think now isn't a great time to start a company. But Kawasaki says there's never been a better time than now.
Raising money has necessarily become a driving focus for the startup community, but Kawasaki said we may have forgotten th
First came the unicorns. Then came the decacorns. Now people are talking about dragons, centaurs, and even ponies.
The world’s tech startups, the people who finance them, and the journalists who write about them, appear in thrall to some sort of collective mass delusion in which startups must be classified according to an increasingly complex taxonomy based on their funding prowess that’s apparently derived from a Dungeons & Dragons rulebook. For the benefit of those readers who come into contact with this increasingly obtuse jargon, here is a brief guide:
Unicorn
The original metaphor. Tech startups valued at $1 billion or more were once so rare—all the way back in late 2013—that they were named for a mythical horned creature. For venture capitalists, investing in a company that was later valued with nine zeros after the first number was considered an amazing feat, akin to catching a creature of whose existence no physical evidence exists. As a metaphor, it is not perfect but it gets the point across. Until, of course, unicorns became as commonplace as horses on a ranch, which led to the invention of the…
Decacorn
What happens when you cross a unicorn with the metric system? You get a “decacorn,” a term first revealed to the world in March this year by Bloomberg, which described it as “a made-up word based on a creature that doesn’t exist.” A decacorn in Silicon Valley, however, is a startup that is valued at $10 billion or more, invented to set companies like Uber, Airbnb, Dropbox, Snapchat and their ilk apart from the common one-horned beasts worth a piddling $1 billion.
Dragon
The other way of addressing “corn” inflation is to change the game. Investors John Backus and Hemant Bhardwaj suggest that their peers should “look beyond the unicorn and find the dragon” because “unicorns are for show. Dragons are for dough.” What is a dragon? The pair did the fantasy-mythology math and concluded that dragons are much rarer than unicorns. More literally, a dragon is “a company that returns an entire fund,” which in plain English means a single investment that pays off as much as a diversified portfolio of investments normally would. Outside the tech world, this is also known as “winning the lottery.”
Centaur
No one can blame venture capitalists for only thinking big. They also deal companies worth less than $1 billion sometimes, and need other mythical monsters to describe them. Dave McClure, founding partner of investor 500 Startups, calls companies valued at over $100 million (but presumably no more than $999,999,999) “centaurs“, which are creatures with the torso and head of a human and the body and legs of a horse. The equine theme remains.
99 VC Problems But A Batch Ain’t One: Why Portfolio Size Matters For Returns
Abstract: Most VC funds are far too concentrated in a small number (<20–40) of companies. The industry would be better served by doubling or tripling the average # of investments in a portfolio, particularly for early-stage investors where startup attrition is even greater. If unicorns happen only 1–2% of the time, it logically follows that portfolio size should include a minimum of 50–100+ companies in order to have a reasonable shot at capturing these elusive and mythical creatures.
Like startups, most venture capital firms fail — at least in terms of returns.
Historically, 1/2 of all VC funds fail to return 1X initial capital. Another 1/4 fail to beat the (much more liquid) public market. Of the remaining “top-quartile” VCs that actually do perform, most can’t do it consistently across multiple funds. Yet we still view most VCs as pseudo-divine interpreters — powerful wizards who peer into their palantir to see the future, tell us what new companies or trends will disrupt existing incumbents, and write big checks to amazing founders who create the next Insanely Great startup.
Except most of the time this is just a big bunch of baloney, and they don’t.
For the few firms that by luck or skill get those predictions right, a strategy of very big bets on a very small # of companies can pay off handsomely. In fact, the more concentrated the portfolio, the better the returns will be for investors, assuming the portfolio still contains one or more big winners.
However in its most extreme form, this strategy devolves into betting all one’s money on a single turn of the roulette wheel, or buying a single ticket in a lottery. Surely winners of such games of chance should not be viewed as financial geniuses. Yet we still worship concentrated portfolio strategy as an industry best practice — when clearly, longitudinal performance of the venture capital asset class has yielded less than stellar results in the average case, and only consistent, frequent success for very few (~5–10%).
In the past five years of investing in over 1,000 companies at 500 Startups, we have found a fewcompanies in our portfolios perform extremely well, but they occur very infrequently. Most of our investments (likely 50-80%) don’t ever get to any kind of exit, or return less than 1X invested capital. Perhaps 15–25% of portfolio companies succeed and result in a small exit of 2–5X. Another 5–10% might attain valuations of over $100M (which we call “centaurs”) and achieve exits of 10–20X. And if we’re lucky, 1–2% attain valuations of over $1B ( “unicorns”) and result in very large returns of 50X or more invested capital. In summary: most investments fail, a few work out ok, and a very tiny few succeed beyond our wildest dreams.
While these numbers might be unique to our own experience and process of investing at 500 Startups, most people in the industry would not disagree that large outcomes happen infrequently, or that a few big investments tend to dominate returns (re: Peter Thiel / power laws, etc). If this is true, then a more prudent VC investment strategy would be to construct portfolio size based on # of investments required to generate at least one big outcome (or ~3–5 large outcomes, to be on the statistical safe side).
Currently most larger VC funds ($200M+) doing Series A/B investments rarely invest in over 30–40 companies, and most micro-funds (<$100M) doing Seed & Series A investments rarely invest in over 50–75 companies.
We believe the current VC fund industry average portfolio construction is inherently & critically flawed, and undersized by a factor of 2–5X. We believe a more rational # of investments is ~50–100 companies for later-stage funds, and at least ~100–200 companies for early-stage funds.
Let’s presume that even for the average khaki-wearing VC — tall, smart, good-looking, went to all the right schools, and likely very white & male — that their portfolio distribution looks something like this
Looks pretty doable, right? With only 7% big wins, a VC fund could theoretically return almost 2.5X — hey, we should all become VCs!
But given the frequency of centaurs & unicorns (5% and 2% respectively in this model), let’s look at three portfolio sizes of 15, 30, and 100 companies.
Highly-Concentrated (P#=15)
Modestly-Concentrated (P#=30)
Highly Diversified (P#=100)
What is excruciatingly clear from this model is that returns are dramatically based on the # and % of unicorns (& possibly also centaurs) that occur in a portfolio. If portfolio size is too small, you risk finding ZERO big wins.
In the model above, if we assume Unicorns occur only 2% of the time, then with portfolio size of less than 50, you might not find any. In fact, given the drama that occurs with many startups and VC funds, you might come to the conclusion that you really don’t feel statistically “safe” without constructing a portfolio that gives you a decent shot at 3–5 unicorns. So unless you think you’re going to pick unicorns at a rate of 5–10 % instead of the 1–2% industry norm, you are essentially GAMBLING with LP money by selecting a portfolio size of less than 50–100 companies.
Depending on how often the average VC is able to find & invest in unicorns, we believe a minimum safe # for most large funds is 50–100 companies, and for early-stage seed funds (where company attrition rates are even higher), we believe a “right-sized” portfolio requires at least 100-200 startups, and possibly up to 500 startups. (hmm, what an interesting number/name ;)
Note: we acknowledge this is a very simple example — management fees and other expenses are not included, nor have we modeled any follow-on capital typically reserved for 2nd/3rd check investments in winners (which might or might not improve overall performance), nor have we modeled the timing of deployment and return of capital, nor any recycling / re-investing of capital.
However, the basic argument remains: portfolios too highly-concentrated in small # of companies risk missing out on ANY unicorns whatsoever.
Ok, it’s a Saturday & since I’m overdue to take the kids to the pool, I’ll skip a more in-depth debate on why VC portfolios are so typically under-sized — my guess is it’s due to the mistaken belief by traditional VCs that they need to serve on boards directly, rather than simply securing the necessary voting rights and control they want that usually come with board seats.
Or maybe they think they’re just better than the rest of us who aren’t tall, white, male, or didn’t go to the right schools. Or who don’t wear khakis.
Or maybe it’s due to all those tee times, I’m not quite sure.
Regardless, we will be sure to discuss this in more detail at PreMoney.
Brexit oblige, les fintech londoniennes songent à traverser la Manche
Il y a quelques mois encore, grande était la tentation, pour les entrepreneurs européens aspirant à créer une fintech, d'installer leur startup spécialisée dans les technologies financières à Londres, plutôt qu'en Europe Continentale. Non seulement parce que la capitale britannique est la première place financière du Vieux Continent, mais également parce qu'elle s'est taillée une solide réputation comme terre d'accueil des jeunes pousses technologiques, en particulier grâce à une réglementation flexible.
Il y a quelques mois encore, grande était la tentation, pour les entrepreneurs européens aspirant à créer une fintech, d'installer leur startup spécialisée dans les technologies financières à Londres, plutôt qu'en Europe Continentale. Non seulement parce que la capitale britannique est la première place financière du Vieux Continent, mais également parce qu'elle s'est taillée une solide réputation comme terre d'accueil des jeunes pousses technologiques, en particulier grâce à une réglementation flexible. Mais le vote des Britanniques en faveur de la sortie du Royaume-Uni de l'Union européenne (UE), le fameux «Brexit», a changé la donne. Désormais, ce sont les fintech londoniennes, tout au moins une partie d'entre elles, qui réfléchissent à installer leur tête de pont en Europe Continentale.
Le 18 juillet, Berlin Partner, l'agence de développement économique et technologique de la ville de Berlin, avait en effet indiqué avoir été déjà contactée par une dizaine de fintech britanniques, en quête de renseignements sur les prix de l'immobilier commercial, le marché du travail et l'hébergement au sein de la capitale allemande. Il faut dire que la renégociation des accords commerciaux, douaniers et financiers entre le Royaume-Uni et l'UE risque de faire perdre aux sociétés britanniques de services financiers leur passeport européen. Ce sésame leur permet, à partir du moment où elles sont agréées par le régulateur de l'un des 28 Etats-membres, d'exercer leur activité dans toute l'UE et, partant, d'avoir accès à un marché potentiel de 500 millions de consommateurs. Une perspective des plus importantes pour nombre de fintech, dont les «business models» reposent sur des transactions de petits montants, et nécessitent donc d'importants volumes d'activité pour atteindre une taille critique.
Le problème du passeport européen
C'est le cas, par exemple, des startups spécialisées dans les transferts d'argent, comme la Britannique Azimo, dont le demi-million d'utilisateurs effectue des transactions de 500 euros, en moyenne, et dont l'agrément auprès de la FCA (Financial Conduct Authority, le gendarme financier britannique) lui permet d'exercer sans encombre son activité en France et en Allemagne, deux pays de l'UE qui ne sont autres que ses principaux marchés, après le Royaume-Uni. Pas étonnant, donc, «qu'un important lobbying en faveur de la préservation du passeport européen» s'organise au sein de la communauté londonienne des fintech, selon Dora Ziambra, responsable du développement commercial d'Azimo.
Même son de cloche chez GoCardless :
«A l'heure actuelle, nous sommes agréés par la FCA et nous portons cette licence dans d'autres pays européens. Mais, demain, nous devrons peut-être obtenir aussi une licence dans un pays restant dans l'UE, comme la France ou l'Allemagne. Cela n'apporterait aucune valeur ajoutée pour nos clients, car nous dépenserions beaucoup de temps et d'énergie à refaire ce qui est déjà en place», expliquait récemment à La Tribune Octave Auger, directeur Europe au sein de cette fintech londonienne spécialisée dans les prélèvements Sepa.
TL; DR Only serial founders with strong domain knowledge and track records and traction get funded quickly. For most founders raising a seed round is a lot more work, but there is a method to the madness.
We often write here about raising capital. Capital allows startups to move faster and generate growth. However, raising capital is not simple, at least for most founders.
Let’s start with what is probably the worst-case scenario – you are a single founder, right out of college, with an idea in a space where you have no domain expertise. That is, you have no team, no product, no traction, no experience in general, and no experience in the space specifically.
This extreme case illustrates the reasons why investors are skeptical – this is a very risky investment situation. You may be brilliant, and you may pull it off and build a massively awesome business, however, this is clearly a very risky bet.
Investors, particularly angel investors, look for ways to reduce the risk when they are funding a company. That’s why the founders who get funded the fastest are the ones who REDUCE INVESTMENT RISK.
Below we discuss the profiles of founders that investors gravitate towards and tend to invest in.
Serial founders
You already know this, but I will say it anyway. The world is not fair.
Serial founders who have been successful are MUCH MORE LIKELY to get funding.
I’ve met many investors who simply would not fund first-time founders. These investors are not bad people; this is just not part of their funding strategy.
When these investors raise money from their LPs (limited partners, i.e. investors who give money to investors), they promise to only focus on serial entrepreneurs. This is no different from an investor saying they will only focus on healthcare or they will only invest in NYC companies. It is funding strategy, and while I personally do not believe in investing this way, I recognize that it is a perfectly legitimate tactic.
Investing in serial founders with domain expertise just makes sense.
First, serial founders avoid making all the silly mistakes that first-time founders are notorious for. Serial founders intuitively know what NOT to do.
They know what WON’T work. Because of this, serial founders tend to execute more efficiently, grow companies in smarter ways, and obtain revenue faster. At least, this is the perception of the investors.
Founders with domain knowledge
When you are starting a business in a space you don’t know much about, you are at a MASSIVE disadvantage.
Think about it, when you don’t know something, you have to study it. To become knowledgeable about physics or international affairs you go to college. You spend years learning, and you have to pay for your education.
When you start a business in a space you aren’t familiar with, investors feel that they essentially pay you to learn the business. That is, you aren’t executing right away—first you are learning.
Investors aren’t your mom and dad; they don’t want to pay for your education.
Investors are attracted to founders with domain knowledge. Investors talk about a so-called founder-market fit.
Why are these founders doing this business? The answer investors are looking for is—the found
However, for all the fixation on companies reaching billion-dollar valuations, it remains pretty rare for a company to hit the unicorn mark. In fact, the number looks to be just above 1% of companies.
Using CB Insights data, we broke down all the companies that raised their first, early stage financing round by year (vintage) and calculated what percent of those companies ended up reaching billion dollar valuations in private markets or via an exit.
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The first notable trend is that the number of early stage first financings by year has seen massive growth, breaking over 4,000 in 2014 compared to less than 1500 in 2008. Of the companies that raised in 2008 and 2009 (which could be consider “mature vintages” at this point), only a bit more than 1% each year became billion dollar companies.
2010 actually saw the most companies, on an absolute basis, reach unicorn status, with more than 20 companies eventually joining the club. Interestingly, 15 companies who raised their first round of financing in 2013 or 2014 have already jumped into the billion dollar club highlighting the increasing pace at which unicorns are anointed. Some of the companies in this group include Zenefits and Airwatch.
How Many Companies Ended Up With Billion Dollar Valuations? 2008 – 2014
Year
Total Companies Raising First Funding (Angel/Seed/Series A)
Anthemis Group has raised $285 million Y-T-D for fintech investments
The company holds more than 30 fintech companies in its portfolio, including automated wealth management platform Betterment
NEW YORK, August 2nd, 2016 – Anthemis Group (“Anthemis”), a digital financial services venture capital and strategic advisory firm, has announced the first close of the Anthemis Venture Fund I (“the fund”). The fund will focus on early stage venture investments, providing pre-seed, seed and series A financing to digitally native financial services startups across North America and Europe. The fund is anchored by the European Investment Fund (“EIF”), as well as UniCredit, a leading European banking group.
Year-to-date for 2016, Anthemis has raised $285 million in capital across its platform from institutional investors and is actively investing in early stage through growth-stage financing rounds.
As an early mover in financial technology with a history of successful venture capital investing, Anthemis is well-positioned to identify companies with innovative, forward-looking, scalable business models. The firm has a decade of experience funding financial technology startups and the founders have spent their careers in the sector.
In recent months, Silicon Valley-based 500 Startups has been keeping a keen focus on Canada. The accelerator is setting the foundation of a national presence thanks to the growing 500 Canada team, which once fully established, wants to invest in one Canadian startup a week.
Now, 500 Startups is choosing Toronto and Waterloo Region as the first site for 500 Labs, a startup studio that will create a supportive environment for working on ideas that could potentially become spinoff companies for 500 Startups.
“A lot of the next big companies are coming from these newer ecosystems and maturing outside of the Valley.”
“One of the things we’re really pushing with 500 Labs is what we’re calling ‘growth by design’. So we’re trying to build a product people want, and then figuring out how to grow. We take this growth question into account at conception of the product and choose to continue with products that we know can grow really fast,” said Selcuk Atli, founding partner at 500 Labs.
People working out of 500 Labs – which will include developers and engineers — will be paired up to work on projects, and leverage 500 Startups’ growth marketing team to determine ideas that have the highest potential for growth. 500 Labs promises salary and resources in an effort to attract senior talent that may want to start their own company, but are afraid to take the leap for whatever reason.
Atli gave the example of a hypothetical University of Waterloo grad, which he says only has a few options should they choose to work at a startup: move to the Valley and join a company like Uber, where they can make money but not necessarily learn new things; join an early stage startup and get some equity; or take the financial risk of starting a company on their own.
“A lot of talented people will find it too risky or not the right time. Maybe they don’t have an idea that they’re excited about, maybe they want to pay bills or rent, maybe they’re still looking or other talented people. That is the opportunity were trying to give these people,” said Atli. “They can come in, there is essentially no failure risk. They work on project, we try validate fast, if the project doesn’t work they move on to the next thing.”
Venture capital firms are pulling back across the globe, slashing investments in startups out of concern their deals may never pay off. Chua Kee Lock thinks it’s the perfect time to move in the opposite direction.
Chua runs Vertex Venture Holdings Ltd., Singapore’s largest venture capital firm with $1 billion under active management. He is stepping up investments this year to take advantage of declining valuations for startups. He estimates he can buy stakes for as little as one quarter the prices from last year.
Chua Kee Lock
Photographer: Sam Kang Li/Bloomberg
“Winter has started,” Chua said in an interview at Vertex’s office in Singapore. “This is the best time to invest because everyone is scared."
This guest column is by Anjli Jain, Managing Partner at EVC Ventures.
We are an early stage VC fund called EVC Ventures, and our portfolio companies approach us with a common problem a lot – we are scaling. We have need for people. Whom should we hire? How do we avoid the trap of hiring just for the sake of it and hire people we don’t actually need?
What follows below is a clearcut roadmap of the first few people you should be hiring that will form the core team along with the co-founders. Let’s just highlight 2 key points here:
The magical number is 15. To keep matters clear and simple the hiring roadmap that is mentioned here works best for small teams up to 15 people. This is the magic number.
You don’t hire VPs of anything. At a stage below 15 people even more than that you are still too small to hire VP of anything. Instead you will need a person who can take all the work in the functional area himself and also be able to build and scale small teams. They should be people who have been working in 2 startups before joining yours, a common Silicon Valley startup rule. Here in India the conditions are slightly different, but nevertheless your new teammate should have worked in at least one startup before ideally in the same stage as yours. You don’t want someone who has recently come from a big company, and especially you don’t want someone who is trying to break into the startup game himself. So be wary here.
What follows below is the hiring roadmap we advise our early stage portfolio startups
A Salesman
There is an everlasting debate about who matters more – the good salesman or the good developer? Lucky for you if you can get both of these dudes early enough. This is the era of the product and that may contribute to developers being overestimated – and hardly affordable.
Here at EVC Ventures we firmly stand with the fact that the good salesman can help an early stage company lot more than the coder. The Lean startup movement made developers much beloved but they can often put your startup into a death spiral with their endless loops of iteration and feedback.
The good salesman on the other hand has plenty of connections to trigger things up. He may seem old fashion for the product guy who is now taking feedback via webforms and various other mechanisms, however he can always pick up the phone in time of crisis – like calling the customer, getting a feedback, organizing a meetup, even pulling few strings for getting some extra survival dollars from his network.
There is nothing as handy as having a good salesman onboard. Get yours quickly and remember the point I highlighted above about not hiring salesman from established corporations. Their need for manuals and procedures will kill you.
UX specialist
Design is 50% out of everything. Good design is what made the difference for Airbnb, Uber and plenty of others. A brilliant design decision to keep the Home page of Google.com with only one field and avoid the portal like appearance of Yahoo was Google’s historical design driven move.
It is notoriously hard to find a good UX specialist these days and she is worth every single penny. Good design can make your product sell on its own. Here at EVC Ventures the UX specialist is the 2nd guy or girl we advise our teams to find and we have dedicated sessions on how to recognize and hire a good UX designer.
VP of Finance
Not really a VP as we already highlighted before, but you get the point. This advice
Software and the Internet are disrupting traditional industries — from real estate to transportation. Next up: Venture Capital.
As the CEO of the venture fund + equity crowdfunding platform Crowdfunder, and a member of a leadership group that was engaged in Washington D.C. on JOBS Act legislation… I’ve had a unique vantage point into the massive changes taking place as finance and early-stage investing are moving online. (more I’ve written re: FinTech here.)
Here are the forces and trends I see disrupting early-stage venture capital.
Disruptor #1: A Broken VC Model
According to a CB Insights article from May 2015, early-stage investor-backed startups (Seed stage) have only a 1.28 percent chance of becoming a unicorn. Meanwhile, the traditional VC model entails funding 30 to 40 startups per fund, which for a top performing fund means making winning investments roughly 15 to 20 percent of the time.
Do the quick math and you see one of the challenges inherent in the traditional VC model.
After investing in over 1,000 startups, Dave McClure of 500 Startups shared some powerful figures about startup investment performance at the early stage here. The data showed that:
50–80% of startups yield no exit/return.
15–25% yield a small return of 2–5x.
5–10% might reach a valuation of $100 million with exits yielding 10–20x.
And with some luck ~1% reach $1 billion valuations returning 50X or more.
As McClure summarizes, “…most startup investments fail, a few work out ok, and a very tiny few succeed beyond our wildest dreams.”
The punchline: most early-stage VCs fail to invest in enough companies, given the data. Of course, a few top performers do manage to “pick winners” at a higher rate than other VCs and beat the odds.
With this, expect new investment approaches to drive change and innovation in the VC industry over the next several years as all facets of Finance are moving online, including Venture Capital.
Disruptor #2: A Faltering IPO Market
Perhaps no indicator is as telling of the infrequency of unicorns as the frozen tech IPO market.
The US IPO market has suffered a steep decline since 2014, its biggest year since the dot-com bubble. Looking solely at the tech / startup sector, the situation is even more dire.
In Q1 of 2016, there were zero VC-backed tech IPOs. Zero.
IPOs are of material importance to VCs, as the liquidity of the public markets is a place where much of their returns are fully realized.
In part to blame for the decline in IPOs is a trend in late stage private capital financing. Unicorn companies have been shunning or delaying IPOs, instead opting to take hundreds of millions of late-stage financing from private investors at huge valuations.
Given these trends, it’s clear that the VC route to liquidity represented by the IPO markets has shifted. This is now driving pressure and change in how VCs look at their investments, their path to investor returns, and their own fundraising with Limited Partners.
Disruptor #3: Traditional VC Dynamics (aka The Curious Case of AirBNB)
The CEO of Airbnb, Brian Chesky, recently told the inside story about raising $150,000 in seed stage funding for AirBnb at a $1.5 million pre-money valuation (now valued at $25 billion). One after another, otherwise intelligent VC firms rejected him and missed out on the round.
Brian wasn’t from Silicon Valley, didn’t have an incredible presentation, and wasn’t led in the door by the usual referral sources that largely generate investment outcomes in the Valley.
In short, dependency on human processes and foibles adversely selected out Airbnb, an eventual multi-billion dollar exit. One lesson: the traditional venture fund process employed for later stage deals is not well-suited for investing at the early stage.
Despite claims that “software is eating the world,” startup investing today is highly relationship-driven and location-dependent. At the early-stage, where there is often a lack of historical data and meaningful signals for investors, raising capital is often less about how good an idea is, and more about who the founders know and how well they present.
Changing this dynamic is part of our mission at Crowdfunder — to democratize early-stage Venture Capital.
Disruptor #4: Disintermediation Through The Internet
In the 1980’s a handful of upstart financial services firms set out to change the way the majority of U.S. citizens were able to invest in the public markets and the brokerage firms that enjoyed near monopoly status over access to investing.
Traditionally, as was the case in the 1980’s, investors had to call a stock broker in order to buy a public stock and perform trades. Brokers made their living on the transaction fees of this activity, often as a percentage of the amount bought or sold.
Of course, this structure created perverse incentives for brokers to continually “churn” investor accounts through unnecessary buy/sell activity.
Internet pioneers like e*Trade & Schwab.com disrupted the traditional process by putting control in the hands of the investors themselves, and creating flat transaction fees (e.g. $8 per trade), thus bypassing the broker and saving investors billions annually. The large existing wealth management and advisory firms, who had been treating themselves to those billions in excess transaction fees, began to shout from the rooftops that individuals weren’t qualified to manage their own investments and that if buying and selling were put in the hands of investors, everyone would lose their shirts.
Fast-forward to today and online brokerage is a multi-trillion dollar capital market. It’s now considered self-evident that investors can and should get access to independent information and trading/investing tools online.
Similarly, today the private equity capital markets are following suit and moving online — from early-stage venture to private equity — all powered by technology, data, and new forms of distribution online to large pools of investors.
Everyday investors are, for the first time, getting access to investing alongside VCs on platforms like Crowdfunder, and doing so for as little as a few thousand dollars per deal.
Disruptor #5: New Regulations and Equity Crowdfunding
What happens as investing into early-stage VC-backed companies moves online, and becomes more open and inclusive through online investing platforms?
A recent Goldman Sachs report, The Future of Finance, highlights my company Crowdfunder and a few others, and defined the total overall crowdfunding market opportunity at over $1 Trillion.
A new wave of innovation and growth for capital formation is being ushered in through crowdfunding. The crowdfunding industry is doubling each year and is estimated to surpass venture capital in 2016 (VCs invest $30 billion per year and crowdfunding as a whole is is on target for $34 billion in 2016). See more data in my prior post — Trends Show Crowdfunding To Surpass VC in 2016.
The new capital market of equity crowdfunding has been doubling each year and is set to explode as an entirely new class of everyday investors, and billions in new capital, come into the market under new laws myself and others helped shape in Washington D.C. (JOBS Act Title II, Title III, Title IV).
With new ways to raise capital competing for the attention of startup founders, a growing number of startups are bypassing VC firms at the earlier stages — where the investor returns can be greatest — in favor of online distribution tools and equity crowdfunding platforms.
Many savvy startups today are using a combined approach of traditional offline angel/VC financing alongside online equity crowdfunding to save them time and increase their reach and access to big and small investors alike.
Disruptor #6: Scale & Diversification In Venture Capital
Given the importance of diversification and Modern Portfolio Theory in other areas of investing… why hasn’t a highly diversified approach been taken to Venture Capital?
Some leading minds in the world of private equity and institutional investment have been asking this question for years. Scott Kalb, Executive Director of the Sovereign Investor Institute and former CIO of the Korean Investment Corporation, have seen and quantified the opportunity for a more scalable and diversified approach to private equity and venture. See Scott’s report and presentation from 2013: The Tipping Point: How Sovereign Wealth Funds are Taking Risk in New Ways and Changing the Game.
One of the reasons this more diversified approach hasn’t been taken yet is that there have been structural and regulatory roadblocks in the way of doing so. At least until now…
A massive new market window has recently opened — brought on through a combination of new securities laws, the exponential growth of online finance, and the global spread of software and automation. And with this new market window open, we’re seeing the Debt/Lending and the Equity capital markets move online.
The debt & lending markets have been about 5 years ahead of the equity capital markets in moving online. In the debt/lending market a flood of new capital has come into the market via “marketplace lending.” Many of the leaders in the space moved beyond the peer-to-peer lending model and found scale another way — by creating diversified investment products that allowed larger institutional investors to come in with millions and spread their risk across a large number of loans.
And we’re just now starting to see early stage Venture Capital follow suit. VCs and their own investors (LPs) are now poised, perhaps for the first time, to adopt diversification as a strategy to capture returns. Instead of being confined to a narrow portfolio of companies in a single fund (usually with 10-year lockup periods), new diverse models are being developed.
Recent regulatory disruption in the form of the JOBS Act are enabling seed-stage investors and VC firms to invest with the same type of diversification they could achieve in something like an S&P 500 index fund, but for angel or early venture stage.
Some examples of these innovate and quantitative VC models are already here. Funds with broad diversification of 10X of traditional VC funds, or more, include Crowdfunder’s VC Index Fund (see in TechCrunch, WSJ). Another less diverse yet highly data-driven venture fund model is SignalFire.
Meanwhile, the new JOBS Act laws and equity crowdfunding create the potential to achieve diversification in the private markets by opening a whole new universe of access to vetted, early-stage investment opportunities for individual and institutional investors alike.
As the Equity capital markets move online, it’s likely that the winners in this new generation of online investing will be the ones who don’t simply scale their platforms and users, but who access the deal flow of some of the leading private investors and VCs — effectively leveraging their expert sourcing, diligence, and selection efforts.
That’s what we’ve done at Crowdfunder with our VC Index Fund. Using several data sets, we developed a quantitative model that has selected a list (index) of leading VC firms at the Seed Stage. Our VC Index Fund automatically invests in Seed and Series A deals alongside these leading VCs, accessing the deals either by referral, via our scalable platform, or by gaining direct access to the deal in the market as any venture fund would on its own accord.
And using this scalable investment model, the VC Index Fund is positioned to invest in a highly diversified portfolio of hundreds of deals sourced, vetted, negotiated, and backed by many of the leading VCs.
In just our first three months investing out of the VC Index Fund we’ve invested in the same rounds / terms as over half of the 50 VCs selected by our model: 500 Startups, Andreessen Horowitz, Arena Ventures, Better VC, Blumberg Capital, Correlation Ventures, Crosscut Ventures, CrunchFund, Great Oaks, Greylock, Kapor Capital, KPCB, Lowercase Capital, NEA, Obvious Ventures, Right Side Capital, SK Ventures, Social+Capital, Structure Capital, SV Angel, Techstars Ventures.
I predict that the future of the early stage investing landscape will look quite a bit different in three to five years. The top tier VC firms will still be around… but alongside them, competing for large institutional investor dollars, will also be more diverse models that leverage software, data, and the web.
PARTYING like it’s 1999 might be unwise, but venture capitalists have reason to open a few bottles of Dom Pérignon. In the first three months of the year American VC funds invested $13.4 billion, continuing their best run since early 2000, before the dotcom bubble burst (see chart). The comeback has fuelled an already heated debate about whether the technology sector is foaming again. It has also attracted competition from a host of alternative forms of financing. Could VC, which has fostered so many disruptive companies, itself be disrupted?
The VC industry has not changed much since it emerged in America in the late 1950s. Most VC partnerships are as low-tech as it gets. They are best understood as brotherhoods (only 6% of partners are female) that invest money in high-risk ventures. Ideally, their cash comes with two even scarcer resources: advice in the form of experienced board members and access to VC firms’ connections. “It’s an industry based on personal relationships,” explains Reid Hoffman of Greylock Partners, one of its stalwarts. “I can’t ask somebody else to make an important recruitment call,” says Peter Fenton of Benchmark Capital, another top Silicon Valley firm.
As a result, the sector lacks something that venture capitalists consider essential for most technology startups: it is not “scalable”—that is, able to grow rapidly. Adding partners to a VC firm tends to reduce returns. “The more people you put around the table, the more risk-averse you get,” says Andy Rachleff of Stanford’s Graduate School of Business, who co-founded Benchmark Capital.
The process of starting and building a business, however, is evolving fast. Thanks to cloud computing and smartphones, among other things, it has become much cheaper and easier to get going. This has led to an explosion of young firms seeking, at least initially, sums not worth a VC’s attention: first financing rounds in the tens of thousands of dollars are common, as opposed to the millions that prevailed during the dotcom bubble.
Conversely, once startups have found a big market, they now need much more money to grow. Hiring top developers, acquiring customers and opening offices abroad can gobble up hundreds of millions. All this typically has to happen fast, since many startups operate in winner-take-all markets. Increasing startups’ needs for private capital even further, few strive to list themselves on a stockmarket as soon as possible, put off by the tangles of red tape associated with such a move.
At the same time, the low returns on many other investments have driven more money towards startups. In America alone VC funds raised more than $30 billion in 2014—nearly twice as much as the previous year, according to the National Venture Capital Association. They are now managing investments of $157 billion. But rival forms of finance for new firms are also growing fast. For instance, America now boasts more than 300,000 “angels”, rich individuals who put money directly into fledgling companies, according to the Centre for Venture Research.
The “seed stage”, when a startup raises its first money, is especially vulnerable to disruption. Most ventures are experiments with an uncertain outcome; investing is often a case of “spray and pray”. Many startups are now launched on crowdfunding sites, where they can raise equity or money for pre-sold products. Firms can also solicit funds on AngelList, a social network of sorts for both founders and angels. Meanwhile, “accelerators” such as Y Combinator and Techstars invest small sums in entrepreneurs with bright ideas, polishing their offering over a few months before serving them up to VCs.
Another set of newcomers in the seed stage are VC firms that limit the size and number of their investments to allow them to focus on helping their wards. These range from “micro funds”, with assets of less than $100m, to somewhat bigger ones, such as First Round Capital in Philadelphia, Union Square Ventures in New York and Mosaic Ventures in London.
The other end of the financing spectrum, the “late stage”, in which companies need cash more than advice, also has lots of new entrants. Big institutional investors are now providing startups with much of their capital. When Zenefits, which offers web-based payroll services, recently raised $500m, the financing round was led by Fidelity, a big asset manager, and TPG, a big private-equity firm. Such deals are essentially “private IPOs”. For tech firms, these now outnumber public ones, according to CB Insights, a financial-data service.
This model was pioneered by DST Global, a Russian fund, which invested more than $500m in Facebook starting in 2009, allowing the social network to postpone its listing. Though welcomed back then, such private IPOs are increasingly seen as feeding what Bill Gurley of Benchmark calls a “risk bubble”. Late-stage investors, he recently wrote, have “essentially abandoned their traditional risk analysis” to get a stake in a “unicorn”—a no-longer-so-rare startup valued at more than $1 billion (the latest census revealed more than 100 of these magical creatures around the world).
Given the competition from below and above, many venture firms are concentrating on filling the gap between the early and late stages. But even in this area, the pressure is mounting, thanks to the technological forces venture capital has helped to unleash, argues Fred Destin of the European arm of Accel, another Silicon Valley firm.
Online media, from CrunchBase to Twitter, allow entrepreneurs to see which VC firms and partners have done which deals. Startups are also much more connected and talk about their experiences online or at one of the legions of tech conferences. Most want to get financed by the best-known VC brands. As a result, business is getting much tougher for weaker funds, many of which have already fallen dormant or closed down.
Nor is it business as usual at the top of the heap. The very attributes that make it hard for the most prestigious venture-capital firms to grow rapidly have shielded them from competition to some extent. Their contacts are unrivalled, and their experience raising other firms from obscurity to fame and fortune is rare. But this environment still requires sharp elbows.
It may be cheaper to start a firm today, but in America the startups with a chance of making it really big each year still number around 15. Over 30 years, just 7% of the industry’s investments brought a tenfold return, and these accounted for 65% of the industry’s profits, reckons Fred Giuffrida of Horsley Bridge Partners, a “fund of funds” that spreads its bets across many VC firms.
To get in on these deals, VC firms often outbid each other, which is one of the main reasons tech firms’ valuations have reached such dizzying heights. Stories abound of entrepreneurs calling at one office after another on Sand Hill Road near Stanford University, where most of the top VC firms are based, with the valuation of their company soaring at each stop.
The increased competition is not limited to money. When Marc Andreessen and Ben Horowitz, two former entrepreneurs, launched their firm in 2009, they opted for a new, more corporate model: its main partners still make the investment decisions, but dozens of specialised partners then help portfolio companies with everything from recruiting to public relations. This approach—plus clever marketing—has proven popular with entrepreneurs, putting Andreessen Horowitz among the most sought-after VC investors.
Older firms are following its lead. Most grand VC firms in Silicon Valley have hired at least one specialist partner, often to help startups in the war for talent. Many also use software to keep track of entrepreneurs, business partners and technology trends. Some are trying to “scale their network”, in the words of Danny Rimer of Index Ventures, a firm with offices in both San Francisco and London. Among other things, it fosters exchange among the executives of its portfolio companies. For now, the changes are small—but disruption usually ends up claiming victims.
This guest column is by 
