For an industry that is ostensibly predicated on being at the cutting edge of technology, venture capital itself has been relatively slow to adopt new technologies. Sure, VCs themselves are all highly technically literate and drive the newest Teslas and have all the latest fitness trackers, but the profession itself looks largely the way it did 20 years ago. Why is that? Will things really be that different for the industry in the next 20 years?
A Tortoise Industry whose job it is to bet on Hares
So why has venture been slow to adopt new technologies? There are a bunch of reasons for this but I will share some of the few that I find most compelling. First and foremost, venture capital is, and likely always will be, a relationship-driven industry. It’s about people and networks. Not about technological supremacy. And that makes sense. It’s hard for there to be a meaningful ROI on technology as a venture capital investor today. Maybe there are some cost efficiencies that can be realized by adopting middle and back-office platforms, but it’s important to remember where VCs make their money. They don’t do it on driving incremental efficiencies. They do it on having outsized, power-law outcomes on companies they get into early enough to have meaningful ownership at the end of the day. It’s especially interesting to compare venture capital to public market investing where technology adoption has been so prevalent. Why the difference? Because in public market investing the margins really do matter. When you are trying to beat benchmarks in a hyper-competitive market with clean and readily-available information, efficiencies generated by technological adoption really do make a world of difference. Since venture capital operates in much murkier waters, there just hasn’t been the same push to roll out the technology.
Another reason that VCs don’t leverage technology nearly as much as they invest in it, is that it is difficult to do so in the spaces they are playing. So much information is obfuscated in private markets. It is really difficult to build any sort of quantitative models or use technology to evaluate companies or entrepreneurs. As the old saying goes “crap in, crap out”. Without access to high-quality information, your options are to A) invest in a niche space where information is relatively available or B) hire an army of pencil pushers to do data clean up and acquisition. It’s really tough. There are just so many different variables you need to take into account. And even if you get all the data you could ever want on some companies, comparing them is extremely difficult at the early stages of a company’s lifecycle. Any VC that tells you they are data-driven today really just means that they have a convoluted grading system that they shoehorn their companies into to justify their own personal biases.
How Technology Could Change Venture Capital
Is venture capital doomed to always be behind the tech curve? I don’t think so. I wouldn’t say that venture capital will ever get to the point of the technological adoption of private markets, but there is a lot of room for improvement. Here are a few ideas on where we could see technology impact venture capital over the coming decades.
Artificial Intelligence
Remember how difficult I said it was to build predictive models for private businesses? There is a good chance that AI changes that in the next 20 years. Why is it so difficult to use analytics in venture? Massive amounts of unstructured data with tons of variables. What is AI good at finding patterns in? Massive amounts of unstructured data with tons of variables. AI has the potential to completely change how companies are evaluated and talent is identified. The biggest challenge will be feeding artificial intelligence models the right kind of data when that data isn’t easily found. If someone can solve the data question, then watch out. If I were you I would keep my eyes on the companies who are building out proprietary flows of that data. Companies like Carta have access to the inner workings of a variety of private companies. What are the chances they leverage that at some point?
Portfolio Management
Portfolio management is tough. Giving all of your companies the attention they need just doesn’t scale well. Technology will continue to decouple aspects of portfolio and fund management from VCs. Automated data collection, quarterly updates, portfolio rebalancing, reserve allocation planning, capital calls, and more. We are in the early innings of this game but there are already multiple players looking to take this work out of investors’ hands. More mature industries like Private Equity have had providers handling much of this work for decades. I expect that we will see more and more venture shops “outsource” many aspects of fund and portfolio management to technology so they can focus on their highest leverage activities.
Fundraising
Within the last few years, there has been a veritable explosion in technology solutions aimed at startup fundraising. I expect that in the future technology will provide solutions for GP fundraising as well. Fundraising is a highly manual process that has not evolved in decades. There is an opportunity here for technology to streamline the space. Matchmaking between VCs raising funds and investors is a highly manual process mostly driven by word of mouth and pounding-the-pavement networking. Technologies that made this process easier would be valuable for both GPs and LPs. Perhaps the place where technology could make the biggest impact is for first-time funds. Believe it or not, the median first-time fund will generally outperform the median fund managed by a more experienced investor. First-time funds however are notoriously hard to raise, especially for people who don’t have an ivy league or tech royalty pedigree. What would an angel list look like for first-time fund managers?
Deal Execution
Every investor knows the difficulty that comes with getting a deal across the finish line. Last-minute negotiations and ever-growing red-line version lists can make the last 5% of a deal as painstaking as the first 95%. Automation has the potential to bring massive efficiencies to these processes in the future. Collaborative documents instead of back and forth redlined word docs. Optimized automatic negotiations based on each party’s preferences. E-Signatures and E-Notaries. These technologies will have sweeping impacts across much of the legal profession and transactions of any kind and they will make a meaningful difference in the way that venture capital deals are executed.
These are a few of my ideas about how technology will change the world of venture capital. Let me know your ideas in the comments below or on twitter. Until next time!