Specialist FinTech Venture Capital
Assembly Capital Partners Limited, Aldwych House, 71-91 Aldwych, London WC2B 4HN
Assembly Capital Partners Limited is an Appointed Representative of Sapia Partners LLP which is authorized and regulated by the Financial Conduct Authority (Ref: 550103)
Today, technology startups are easier to create and cheaper to set up…
- a much more supportive startup ecosystem
- many traditionally core functions can be automated, outsourced or offshore
- distribution via the internet is cheaper and potentially at zero marginal cost
- enterprise grade IT on a PAYG model: hardware is cheaper; software is cheaper or free
…so for the founders of an early stage company, the cash invested by a venture capital firm is worth relatively less than it used to be…
As a result, the VC industry is, we believe, in transition, moving to a “barbell” structure:
- VCs have been incentivized by fee structures to become ‘asset gatherers’ raising large funds
- They then have to make larger investments to have any impact on the performance of their funds. Smaller investments seem uneconomic to the venture investor, but…
- …early stage firms now need much less investment as we argue above.
- Hence, the actual needs of startup firms are now often met by ‘Angel Investors’
- When this happens, the founders may develop strong relationships with their ‘Angel Investors’. These are not easily displaced by VCs and, where ‘Angel Investors’ have sufficient access to capital, they may continue to invest in further funding rounds. The result—VCs are not doing all of the deals they would formerly have expected to.
- At the other end of the funding cycle, large global investment firms now invest in later stage growth firms before the latter go public. These firms can invest very large sums, especially in the later stage funding rounds of successful growth firms, e.g., the so-called unicorns. The investment record of such firms investing in venture type deals is mixed but they are unlikely to desist.
So, VCs are being squeezed at both ends. In the environment described above, what might a successful VC look like?
…We believe the market is bifurcating…
Strong early stage businesses look not just for cash but for the greatest degree of support (advice, expertise, networks, etc). Successful ‘Angel Investors’ or those VCs genuinely focused on early stage firms are likely to provide this. At some later point, the founders look for validation i.e. a marquee investor. Here the large, established VCs have a competitive edge. Of course, they offer more than money—expertise, huge networks, advice on exits etc—but their principal attraction to an entrepreneur at the time of investment is the validation from the brand.
Hence our belief that the VC market is bifurcating with big name VCs generally investing later and specialist VCs and Angels discovering strong early stage firms. As a result, we believe Funds stuck in the middle risk losing out on quality deal flow.