The Diffraction of Venture Capital
European Straights, 2020-07-15
MK: I love Nick Colin’s content from European Straights and if you can afford GBP 15/mo, please subscribe to his paid email list. Don’t want to be ungrateful to him.
Analogy: light waves get spread out as a result of passing through a narrow object.
The edge is the shift from financial capital into production capital.
Various Wave Forms
VC – no surprise here. Very good for software (increasing returns to scale). End game: the winner takes most. Room for one major player, intense competition. High Risk / High Reward.
Venture Debt – complement to equity financing [MK: I’ll need to write about it later]
Revenue-based Financing– get paid now instead of later. [MK: my old company used to do it in 2007-2009 and it was a serious source of extra revenue for us]
Private Equity – focusing on profitable companies
Hedge Funds – and many other forms of alternative financing.
Different approach to diversification: learn to earn less, but from difficult markets, attract different kind of investors, production capital and still money to be made.
Something About VCs
Upstream: need basic research funded by govt/large companies to make the tech robust and abundant. Risk: entering the market. Must not bear TWO risks: market + research.
Downstream: liquidity, of course. IPO, trade sale, no one wants a dividend machine. [MK: the appetite for dividends may change since 2020 with the lack of exits]. IPOs since 2019 and COVID are not so attractive.
IPOs were the go-to paths to exit (if not – trade sale), not anymore, at least outside of the US. This is a huge inconvenience.
Since 2008 VC investment into software hasn’t been the dominant model.
o Software eating the world: companies are entering tangible industries [WeWork?] and regulated markets [fintech, healthcare].
o Scarcity of exits (see above): aim for profitability sooner [MK: we at Aviasales have been profitable since day one]. But yes, this means less capital and less sexy billion-dollar exits.
Both these trends mean lower scalability and lower returns for VCs. Look for other sources of funding?
How Will VCs Look Later On?
Traditional VCs are here to stay, provided they have a name.
Large multi-asset powerhouses. Different means of funding based on the needs of the firm and the types of firms.
There will be nothing in between, because why bother with anyone but a leader?
What’s in It for Europe?
Currently – still attempts to copy SV as of 10 years ago.
Software is eating the world © :) - firms are branching out to difficult industries. Lower return potential, require faster profitability. Not enough funding tools and opportunities to scale.
SV, nonetheless, is going towards the path of less scalability and more profitability. There’s enough room for everyone, but this new approach is what EU needs, but lacks.