The venture capital (VC) industry has been redefining, reinventing and repurposing itself in recent times due to the influx of online crowdfunding platforms, accelerated technology cycles and a newer generation of founders. This has required venture capital funds to increase their relevance, become agile and transform themselves into more than an investment partner to founders. In this article, I’ll discuss several factors that are helping venture capital funds to innovate and differentiate.
Venture capital funds play a profound role in financing, accelerating and invigorating the startup ecosystem. Venture capitalists take on an investment’s risk either as a standalone investor in a startup or as part of a financing syndicate with a lead venture capital pulling together the syndication.
In recent times, the syndication model has proven to provide better outcomes for investors as well as for startups. Cross-border venture capital syndication between venture capital firms in the U.S. and in the emerging economies, such as India, are creating immense synergies for the relevant U.S.-based VC firm, the local VC firm and the startup as cross-border syndication increases the chance of good exits.
Through their investments, venture capital firms typically tend to obtain either a board seat and/or a board observer seat through which they perform an advisory role guiding startups into growth trajectory. However, venture capital firms have upped their game recently to provide a much broader role than financing. They have been bringing in expertise in product strategy, product-market fit, customer acquisition and, most importantly, helping enterprises pivot to their second act, when needed. This further emphasizes a VC firm’s relevance in a startup’s success.
Technology life cycles have shrunk. Newer market categories are springing up and disappearing quickly, which impacts the life cycle value of an industry on a time-horizon scale. This requires venture capital firms to be agile in managing their deal-flow funnel.
Venture capital firms are beginning to use proprietary and in-market tools to more efficiently manage the deal-flow funnel, analysis and investment. Here’s an example of how this can work: The deal flow starts with a startup submitting a form that feeds itself into deal-flow management and due-diligence systems. The data-driven digital tools enable venture capital firms to streamline data collection and manage deal flow and portfolio companies. In the spirit of differentiating and adding value to its portfolio companies, the VC firm then begins its structured engagement, which includes review of product-market fit, product architectures, executive hiring and go-to-market strategies that can lead to accelerated pivoting in the right direction for growth and success. Venture capital companies are going to the extent of productizing, branding and customizing their structured engagement resulting in value creation for the startup and the investors.
Technology and processes can go a long way in the highly relationship-oriented business of venture capital investment. But venture capital is not simply a business of investment or investment in a business; it is an investment in a founder’s conviction, vision and ability to execute. Mentoring founders and their founding teams is a unique value that many venture capital firms are including in their engagement model with startups. Mentoring provides significant benefits to startups, such as helping to build their organization’s culture and helping them enshrine their beliefs and values as they enter hyperscale mode. Venture capital companies are also going beyond mentoring by conducting special skill-building workshops, sourcing digital libraries and sponsoring portfolio companies’ employees in professional programs.
The venture capital industry is being challenged by a newer breed of players including incubators, accelerators and micro funds. It is pertinent that investors such as limited partnerships, family offices and fund-of-funds partner with venture capital firms that can differentiate themselves, and likewise startups partner with VC firms that can become strategic partners beyond funding and gaining equity. Mainstream businesses are transforming, and so too should the venture capital industry. The mantra of innovate or die does not have an exception, including the venture capital industry.
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