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Venture capitalists fund the innovation economy. With $130.9 billion invested in venture capital funds in 2018 — more than the previous heights set during the dotcom era — you might think that we will see lots of exciting new companies with innovative products and services creating lots of well-paying jobs. The truth is that the investors that invest innovation — the limited partners (e.g., pension funds, foundations, endowments and family offices) — are trying to de-risk their investments by investing in later-stage venture capital funds. These companies have figured out their product-market fit and go-to-market strategies. While later-stage companies are more stable and less likely to go bust, they are also less likely to deliver a high return on investment.
The number of angel and seed deals declined dramatically, according to Venture Monitor, 4Q 2018 by PitchBook and the National Venture Capital Association. This is despite research by the National Association of Investment Companies and Cambridge Associates showing that venture funds, run by diverse managers who invest in early-stage companies outperform the sector.
There is, of course, another reason that institutional investors, with billions to invest, put their money upstream where funds are much larger. Doing so is more cost efficient for them. It takes more time and money to identify and manage smaller investments in more funds.
“The reality is that this is a long-tail business,” said Leslie Jump, CEO of Different, a research platform that reduces the time, money and expertise needed to evaluate venture funds. The greatest upside potential is in investing in what’s different. Diverse fund managers — gender, race/ethnicity, geography, industry — have the networks to find founders who see opportunities in the market that others do not.
In addition to reducing the time to evaluate funds’ performances, Different also creates both custom and off-the-shelf products in which it bundles together funds under a particular thesis. Then Different packages the fund(s) in a way that is highly attractive for investors.
There’s potentially a lot more money to invest in venture capital, calculates Jump. This could drive sustained economic growth. Her back of the envelope estimate:
- The top 5,000 institutions and the top 5 million households have $32.5 trillion in assets.
- A typical portfolio strategy for these investors recommends allocating 2% to 4% to venture capital.
- Using the low range of the allocation, there is a potential pool of $650 billion to invest in venture capital.
Perhaps in response to the #MeToo movement, Different is fielding many questions from institutional investors and venture capitalists about the women who are leading these emerging manager funds. To answer their questions, Different produced the 2019 Women Leading Venture Report. Jump really dislikes the idea that looking at past patterns can help you decide where to invest. The past doesn’t necessarily predict the future.
The report sheds light on who these up-and-comers (women who are emerging manager GPs) are and how they differ from the women on the 2018 Forbes Midas List — the most successful VCs. The up-and-comers are defined as women on the management teams of emerging manager funds (Funds I, II and III) that are $100 million or less. The women are investment decision-makers and have a meaningful stake in the fund. By painting a picture of these women, we potentially know who the next generation of women on the Midas list will be, commented Mack Kolarich, chief product officer at Different.
So what could the next generation of women on the Forbes Midas List look like and how will they differ from past generations? The next generation could:
- Be less Bay Area-centric and more geographically diverse. New York is on the rise.
- Be less academically elitist — attended Ivy or elite universities and colleges — and more of an academic generalist with less STEM studies in their background. Other people on the team can be the technologists.
- Have less technical and finance expertise and more sector expertise.
- Be less likely to have had GP experience prior venture experience compared to up-and-comers and
- Be more likely to have worked in a startup, been a founder and have experience scaling a company.
Between 2019 and 2018, a growing number of women made it to the Midas list. The number is still small — only 12 — but that was a 33% jump from the previous year when there were just nine. Knowing how to spot a rising star could skyrocket the performance of your investments and heat up the economy.
What kind of background will you look for in the VCs in which you invest?
April 17, 2019 at 08:18AM
Forbes – Entrepreneurs