How to invest as a small VC or business angel in light of even bigger rounds and high valuations

The Venture Capital (VC) firm Accel has shown the world how to monetise 7.5bn USD worth of tech firms in 3 months following the successful IPOs of Slack, Crowdstrike and PagerDuty. Andreessen Horowitz (Slack, PagerDuty, Pintrest, Lyft) and Bessemer (PagerDuty, Pinterest) have also done similarly well in this stream of tech IPOs. More and more funds are following the Series B through to IPO route.

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Source: Venture Pulse, Q4’18, Global Analysis of Venture Funding, KPMG Enterprise. *As of 12/31/18. Data provided by PitchBook, January 15, 2019

Why is this and what does it mean for smaller VCs and business angels?

Essentially, we have observed 3 major market shifts:

  1. VC fund raises are getting larger in real terms as a natural consequence of larger ticket sizes at the Series B level
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Source: Venture Pulse, Q4’18, Global Analysis of Venture Funding, KPMG Enterprise. *As of 12/31/18. Data provided by PitchBook, January 15, 2019

2. There is increased competition from more VCs chasing the same deals, leading to a drop in performance. The first vintage of Dawn Capital and Index Ventures funds had an IRR above 30% whereas now the average VC performance is close to 8%.

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Source: BVCA Private Equity and Venture Capital, Performance Measurement Survey 2017, PWC

3. There is now a larger amount of historical data available. This makes track records more indicative and the Limited Partners behind the VCs are judging funds more on historical numbers rather than reputation and future promises of returns. This has incentivised funds to find new ways to differentiate themselves.

So how can funds differentiate themselves in this landscape?

Fund size: a new competitive advantage

Well known venture capital firms are competing on fund size. A larger fund means the ability to invest at a later stage when there is less competition. The IPO gives exit visibility that was missing in the past.


Many funds have chosen to focus on a particular subsector where they have great expertise or a particular geography where their reputation has allowed them to source better opportunities.

Tech lending

An alternative is to change focus to a near adjacent market, in this case the tech lending market.

Tech lending allows an investor to capture a similar opportunity to that of the equity market with the positive trade-offs being:

No valuation discussion — Valuation is not an important parameter of the underwriting process. Therefore, many sensitive discussions can be avoided leading to closing deals faster when competing for better companies.

Stability of returns — There are various forms of tech lending, but what they (mostly) have in common is the recurrent payment of interest. One of the benefits is the ability to recycle the initial capital over time whilst keeping some optionality on the future of the firm via warrants.

A focus on cash generative companies — Whilst tech companies often don’t show an overall profit in the beginning of their life-cycle, many of them are profitable at the product level; the cost of the product and of the selling effort is less than the revenue the sale generates.

A financial performance comparable to equity funds despite the significant reduction in risk.

In Summary

The VC landscape is maturing and many VCs have been changing their approach as a consequence. it is clear that the bolder funds have seen the challenge as an opportunity to pull away from their competition by increasing their fund size.

However, there are various other alternatives to build a competitive advantage that are relevant for smaller funds and business angels. Besides a strong sector or geographical focus, tech lending has been a clear way for many tech investors to differentiate themselves and achieve very similar returns.