The Evolution of the Funds Market
Venture capital funds have a long and storied history. They have seen legendary returns, like Andreesen Horowitz’s 28X from Instagram and have also seen historic failures (see Juicero). The world of venture funds has historically maintained an air of exclusivity, being led by just a handful of individual fund managers and accessed by a small number of institutional investors and industry insiders. Yet, according to Richard Norman, formerly of Davidson Kempner and H/2 Capital Partners, OurCrowd’s Managing Director of Funds, the funds market is evolving rapidly to include a broad range of opportunities for a wider range of investors.
The Wealth of Opportunities across Sectors, Stage, and Geography
Today, the world is seeing a remarkable boom in funds. Venture has traditionally been a one town industry: Silicon Valley. Yet the global tech scene is providing serious competition. With robust ecosystems from Tel Aviv (Silicon Wadi) to New York (Silicon Alley), Bangalore to Barcelona, fund managers are not only branching out beyond the U.S., they are making their investment thesis about peripheral geographies. Says Norman “Different people will have different appetites across different buckets, but there is a growing trend in the fund world towards expansion. This trend is really exciting for OurCrowd, because our platform offers a very broad amount of sectors stages and geographies, whereas our funds allow our investors to concentrate their interests into buckets that they want the most exposure in.”
Oxx, for example, was founded by former partners of Amadeus capital, a top quartile UK VC fund, with a focus on B2B software companies in the UK, Israel and the Nordics. Oxx provides scale up capital to help companies in these markets to expand their businesses across Europe and beyond.
According to Norman, there are a few potential reasons for this global expansion. Firstly, “advances in technology (e.g. cloud computing) have significantly reduced business setup costs, meaning that entrepreneurs can build a commercial product without requiring access to large sums of capital”. This allows a startup culture to flourish before deep-pocketed capital enters the market. Another is that companies from less traditional geographies have proven themselves capable of competing on the international stage, like Spotify (Sweden), Mobileye (Israel) and DiDi (China). This continued evolution of non-U.S. markets has greatly increased the pool of potential investments for funds and is a trend that shows no sign of slowing down.
Similarly, as the rate of technological innovation increases, new sectors are emerging to disrupt modes of operation that governed the last century. Examples include autonomous mobility reshaping transportation, additive manufacturing disrupting industrial production and blockchain technology reimagining how we transact. Long gone are the days of the singular focus in venture, which gave rise to the dot.com bubble – today the breadth of industries that VCs are focused on is staggering.
Differentiation of Strategies
As the venture investment market matures, an increasing number of funds are developing innovative strategies for sourcing opportunities and deploying capital. These include a focus on follow-on rounds, pre-emptive rights monetization, down-rounds and hybrid models integrating accelerators / incubators. These are all strategies which are a far cry from the generalist approach that was taken a decade ago.
Says Norman, investors are looking to not only diversify their portfolio with one fund; they are looking to invest in several funds. Funds with a “clearly defined investment focus make it easier for investors to make selection decisions and more create a tailored portfolio of fund investments”. Additionally, “more and more high-profile investors and organizations are realizing that their capital and networks can be leveraged to make thoughtful venture investments”. A great example of this is OurCrowd’s ADvantage fund, a new sports-tech fund developed in partnership with sports moguls Klaus, Horst, and Stefan Bente.
Additionally, as investors become more involved in their funds, they are also starting to looking into the impact their investment will have. Impact investment is the future for many charitable contributions. Young entrepreneurs are not just interested in what will make money, but also what will add social value and positive impact into the world, and fund are being created to support their efforts. Educational institutions in particular are looking towards these kinds of investments. The trend towards for-profit yet responsible companies is revitalizing the previous purely profit-driven financial world.
Emerging Funds Managers
There is a common theory in the startup world that serial entrepreneurs will do well, but the people who hit it out of the park are first timers. Note that the founders of Apple, Amazon, Microsoft, Google and Facebook were all first-time founders. The same may prove true of fund managers.
Emerging managers are not saddled with the legacy concerns of prior funds (which can be a large time / resource drain) and have usually not raised enough capital to generate meaningful profitability from management fees. They are hungry for impressive returns to establish a track record and gain industry credibility. Furthermore, lack of investment experience, particularly with very early stage companies, can be compensated for with deep business acumen and industry-specific expertise.
Coupled with this trend, investors are becoming more flexible, looking beyond venture capital backgrounds towards experienced industry experts moving into the fund-raising field, blurring the lines between the startup and capital worlds — in a very positive way.
Investing with an Online Platform
As startup investment becomes democratized, with leaders like OurCrowd at the helm, so too does startup fund investment. Venture funds are turning towards equity crowdfunding platforms as a source of capital, and the adjustment in approach is a win- win situations. Fund managers are improving their reach by accessing large investor communities at the same time, rather than spending the daunting 12-18 month fundraising cycle in one-on-one meetings. Norman explains “Fundraising isn’t fun, so having a partner that has a network of strategic multinational partners, over 25,000 registered accredited investors and a name that carries far beyond that is a very useful tool. Fundraising often takes 12-18 months, and many managers don’t hit their target, so reaching such a large audience is a huge boon and allows the manager to focus on investing.” They are also accessing resources like business development and are offering their startups the reassurance of having a deep-pocketed backer more likely to be able to provide follow-on capital.
By offering funds, these online platforms are providing increased opportunities for investors to diversify. With a single investment into a fund, an investor can participate in a portfolio of 12+ companies, getting exposure to venture while mitigating risk. It also affords the investor the opportunity to invest in sectors of his/her choice, for example in Artificial intelligence, without having to diligence each of the underlying companies. Online platforms are also tackling the challenge of presenting the essence of a fund, the fund manager, to their audience by giving investors access to the individual, through interactive webinars, internal vetting, meet the manager sessions, and events allowing the community to get to know the individual on a deep level.
It’s a fascinating time to be a fund manager and a fund investor. Just as so many other sectors are embracing innovation, the financial space is also offering new and alternative ways to become involved. To see fund investment opportunities at OurCrowd, visit www.ourcrowd.com.