Berliners keeping an eye on venture capital trends in the US, take note. Fred Wilson, blogger and co-founder of top New York VC firm Union Square Ventures, says capital markets are swinging more in favour of founders.
Speaking at the Grind co-working space in Manhattan yesterday (not pictured), Wilson suggested some deep changes will be needed for VCs in the US to stay relevant and profitable against a rising tide of angel investment, crowdfunding and foreign capital, particularly from Russia and the Middle East. One option might be to rethink allocation; another to take a more active role in crowdfunding.
You could say Wilson is well-qualified to comment. Union Square’s portfolio includes success stories Twitter, Tumblr, Berlin’s SoundCloud, Foursquare and Zynga, as well as leading crowdfunding platform Kickstarter.
We have met the enemy… and the enemy is us
This month’s Kauffman Foundation report, “We have met the enemy… and he is us: 20 years of VC investments”, claims the average VC fund in the US barely manages to return investor capital after all fees are paid (with institutional investors taking a fair share of the blame).
“Most VC funds do not generate returns three to five per cent better than public markets, as investors expect,” the report states. In fact, “VC returns haven’t significantly outperformed the public market since the late ’90s”.
This, as Wilson pointed out, despite up to $30 billion now flowing into venture-backed companies in the US each year, compared to $10 billion in the early ’90s. “There’s two times as much capital in the venture capital business today than we, the professional investors who make up the venture business, can actually put to work intelligently,” he said.
Meanwhile, angel investment in the US is increasing (fivefold in the last five years) and so is foreign investment from the likes of Russia’s Yuri Milner. Crowdfunding, whether it’s equity-based via the new JOBS Act or non-equity based through Kickstarter, adds to the options already on the table for founders. All this is “bad for VCs, good for entrepreneurs,” Wilson said.
Wilson isn’t suggesting venture capital is ”dying”, just that it’s time for a strategy rethink. Smaller or more selective funds might be better options, or more of a focus on VCs as mentors and advisors in exchange for equity. Another option might be for VCs to start leading crowdfunding rounds and “do something interesting there as opposed to going out and raising money from the institutions”.
And now, back to Berlin…
Wilson’s talk underscores a recurring theme at Berlin Web Week – there are more options than ever for founders seeking capital (incubators, company builders, accelerators, VCs, crowdfunding). All you need is one-off early money? Great, go for crowdfunding – if your country’s regulations allow it. If you’re less experienced, an investor/mentor or incubator might be better. Whatever you do, choose carefully. As Passion Capital’s Stefan Gläzner puts it, “it’s harder to get rid of your investor than your wife”.