The Strategic Value of Early Stage Venture Capital:
Venture capital, and especially early stage venture capital, differs from other asset classes as it not only has financial benefits - potential high returns with low correlation to traditional asset classes - but also additional strategic benefits.
Corporates and other industry groups are attracted to the startup sector as a key component of their innovation strategies. As well as a financial return, corporates are seeking strategic advantages that may include distributed R&D, partnerships, M&A activity and insights into potential threats and opportunities to their core business activities.
"You can systematise innovation even if you can't completely predict it"
(Eric Schmidt - Technical Advisor & Board Member Alphabet Inc.)
To invest in venture capital, investors have traditionally:
1. Managed their own money: this requires larger amounts of capital, access to qualified deal flow and expensive & sophisticated back office resources; or
2. Invested in funds: this means minimal mandate control, limited co-investment opportunity, closed-end fund structure and no investment committee participation
But now there is another alternative:
3. Venture Capital as a Service (VCaaS): this can be a fully outsourced service, or it can be a a platform providing organisations with the opportunity to complement existing, or build new, in-house VC capabilities.
VCaaS delivers financial & strategic (distributed R&D) return, as well as scale, context and focus, providing the client with a pre-screened & de-risked pipeline of qualified late stage startups for direct investment.
Challenges and Solutions:
1. Democratization of Startups & Innovation:
With a lower cost of starting up, technology innovation can occur anywhere.
There are tens of thousands of startups working on any particular vertical’s related innovation globally. Global scouting requires global resources and networks.
2. Early Stage VC Provides Critical Distributed R&D:
The driver for investment in most asset classes, including late stage VC, is a strong risk-adjusted return.
Uniquely, a diversified portfolio of early stage startups delivers both a strong risk-adjusted return and a strategic return - distributed R&D.
3. Asymmetrical Skew of VC Investment Risk:
90% of returns are generated by the top 10% of startups. Early stage VC investing requires a scalable strategy that avoids uninvestible startups and invests broadly in the best 10%.