The global venture capital landscape is changing rapidly. Some of these trends are well documented, while others are just emerging.
I’m writing this piece to highlight what they are and explore how they might evolve.
Going Earlier and Earlier
This is a well-established trend with the emergence of ‘crossover funds’ like Tiger, Coatue, and others who hold long/short positions in public equities and private companies.
While many of these funds had previously dabbled in the private markets, they have recently developed full-scale strategies starting with growth investments but now even investing at the pre-seed stage.
A crossover fund can often justify ‘over-paying’ for their investments because they expect to lead future rounds and buy up ownership over time.
In this way, a fund like Tiger might be able to value a company at 20% higher than others might, thereby reducing dilution faced by founders and using this to win the deal.
On the other hand, Solo funds can move significantly quicker and often provide differentiated value add.
This can include access to an audience in the case of NotBoring, design support in the case of Form Capital, and talent acquisition at Human Capital.
Fund of Funds
Going earlier and earlier has a natural limit.
Pre-seed investing is extremely opaque and hands-on and, therefore, hard to scale. The next iteration of this is to seed funds that might be able to offer differentiated returns.
It is common knowledge that Tiger has begun to LP many funds run by so-called ‘solo capitalists.’ These funds usually are sub $20m and focused exclusively on the pre-seed and seed stages. In this way, Tiger has a proprietary deal flow pipeline with significantly less effort and will be the later stage (Series A and beyond) partner of choice. In many ways, this enables crossover funds to become the funding partner of choice for the whole life of a company.
What does this mean for investors?
While the impact of this is still to be panned out, it seems likely that the future of investing is likely to squeeze out the middle ground and favor either micro-funds or crossover funds. Where micro-funds can truly move fast, provide differentiated value-add and access to growth capital via LPs and crossover funds can offer better terms and a promise of later stage capital.
Original post. Reposted with permission.