From value-added VCs to equity crowdfunding syndicates : the new platforms of the venture capital industry

Abstract

"If you look at the venture business, for an industry that funds innovation - it really doesn't have that much", declared Josh Kopelman, founding partner at First Round Capital, in 2013. Notwithstanding, observing the industry in the last decade, one can identify at least two evolutions. First, a new generation of VC firms, to which First Round Capital belongs, has emerged and is reinventing VC firms' traditional organization to offer additional services beyond investment capital and their partners' time. Second, equity crowdfunding, spearheaded by equity crowdfunding syndicates, now allows entrepreneurs to raise funds entirely online and has become an interesting alternative to traditional venture capital. This paper's first objective is to describe and evaluate the strategies embraced by these new types of value-added VC firms. The second objective is to review online syndicates' characteristics and their evolution since their inception 3 years ago. I first consider whether they can become credible competitors of VC firms and end with a few predictions regarding the space equity crowdfunding syndicates are likely to occupy. I show that the new emphasis placed on VC firms' value added services has empowered new entrants in the VC market, enabling them to break into the concentrated circle of the very few VC firms actually earning significant returns. Beyond the objective of improving their portfolio companies' operating performance, I show that VC firms embrace this strategy in order to 1) increase the size of their inbound deal flow, 2) improve the firm's brand and 3) provide General Partners with additional arguments to close competitive deals. In a second part, I argue that online syndicates could increasingly embrace the key success factors shared among successful venture capital firms. However, their lack of reputation may undermine their performance in the next venture capital cycle. I conclude that equity crowdfunding syndicates are primarily an interesting addition to the traditional early-stage industry, rather than a substitute for traditional VC firms. Lastly, I show how VC investors can take advantage of online syndicates to increase their firms' competitiveness.