Why the future of VC investment will be more about ‘venture building’ than equity share
- 05 Mar 2021
Article by Shawn Tan as featured in Global Banking & Finance Review
We all know that historically the VC industry has been based on the belief that if one portfolio company goes bust, it doesn’t really matter. The bigger bet is that another portfolio company’s breakout success will override the losses of the rest. It isn’t surprising then that there are plenty of VC horror stories, which are not difficult to find.
Whether it’s the M&A bait and switch or sacrificing future profitability, the old ways of doing VC can be famously detrimental to entrepreneurs. For example, a founder who sells their startup for $1 billion could end up with less money in their account than someone who sold for $100 million.
Shawn Tan – CEO, Skymind
It can take multiple funding rounds to reach the billion-dollar valuation, with each round chipping away at the founder’s stake in the company. Ultimately founders can end up with a tinier slice of a larger pie when the truth is that the bigger portion of the smaller pie could have been much more valuable.
Yet over the last decade, the VC market has exploded: Crunchbase shows more than $1.5 trillion invested into venture capital deals globally over the past decade. VC isn’t going anywhere, but I believe it is evolving, and in the future, VC investment will place more emphasis on venture building rather than equity share.
Forward-thinking VCs will seek out innovations that are good for society and not just their business value, mirroring a rise in environmental, social, and governance (ESG) focused investing. Last year, 38% of financial professionals were using or recommending ESG funds, with nearly a third of financial professionals planning to expand their use or recommendation of ESG funds over the coming year.
This symbolises a paradigm shift into a more socially responsible form of capitalism, where there is an emphasis on serving “stakeholders” like customers, employees and communities as opposed to only shareholders. Beyond genuine environmental concern, ESG investing can also be seen as a risk-management strategy. There is more long-term viability for companies that are run sustainably, from both consumer and regulatory standpoints.
As a result, VCs will be looking for disruptive and tenacious founders. They will actively seek out entrepreneurs set on creating technology with the most significant social impact, who have plans to get their ideas to market as quickly as possible. The future of VC investment will be about creating true partnerships with the companies they support, which is the heart of venture building.
Venture capital has historically been about placing a certain amount of money in a company and hoping for a certain return. On the other hand, venture building requires much more from the investor: time, energy, services and expertise, alongside capital. Venture building is about selecting business ideas, creating teams, sourcing funds, supporting the ventures and supplying shared services.
It is about working closely with the entrepreneurs to supply them with an entire suite of service support, from financial backing to corporate client introductions and talent acquisition. The quality and dynamics of networks play a unique role in the venture building model. The model relies on sourcing a specific and unique blend of expertise to turbocharge portfolio companies faster than competitors.
In an increasingly globalised world with large-scale challenges never faced before, we firmly believe that venture building with ESG credentials will become the gold standard for investing in the future. We are excited to be taking this approach at Skymind, and we hope that it won’t be long before others follow our lead.