Last year, I was well on my way to apply to the executive program in Venture Capital (VC) at the Harvard Business School. But then I changed my mind, as I realized that the old ways and the associated structures of funding startups are also being disrupted.
I am sure that I would have learned a lot from the Harvard course, and they have probably already adapted their curriculum for a new reality. However, I gathered that if disruption really is taking place in the startup funding scene, I would probably learn as much or perhaps more from taking an active and hands-on part in the actual change taking place as we speak.
So, I have dedicated most of my time this past year trying to understand what is going on.
As I am located in Norway, my observations are mainly based on working with scaling and investing in startups that originate in a rather small market. I have, however, spent quite some time this past year working closely with people from the VC scene in Silicon Valley, so many of the observations are based on a combination of looking at the world´s most mature VC scene and a less mature and substantially smaller VC scene.
So, this is what I have observed:
- Startups mature faster than before
- Open tech standards mature companies earlier. Whereas you would need 70-80 developers to get a tech product market ready during the dotcom era, now you can more easily bring a product to market due to cloud solutions, open APIs and more digital standards. This means tech companies become market ready faster than before and the investments move upstream (earlier in the companies´ lifecycles).
- Access to the right human resources scales companies quicker. More people now want to work at startups than before, which makes it easier for startups to secure the right people to help them scale.
- Since tech companies are bringing products to market earlier in their lifecycle, investors see that they need to come in earlier than they are used to from before. This means the investment stages as we know them are becoming unclear. Examples of capital moving upstream, are Belgian VC firm E-Merge that moved all their investments onto AngelList or the pan-Nordic Private Equity fund Summa Equity, who has allocated parts of their fund to the venture stage.
- Tech innovation has become global
- Due to digital developments and the open standards mentioned above, it has become possible to develop and launch products that become global in nature from the start. This means innovation is happening all over the world, and not as focused on a few regions like Silicon Valley.
- There is increased interest from venture capital to move across borders. I have just written interest, and not actual capital moving across borders. I have noticed more activity in terms of international VCs visiting us for local startup events here in the Nordics, like Slush and Oslo Innovation Week, however, actual funding has not started to “pour in”, and most capital is still deployed locally where the capital originated. It may be explained partly that the vehicles that makes it easy to invest across borders does not exist, but we should expect to see some of these vehicles start evolving. The valuation arbitrage between f.ex. Silicon Valley and other locations is far too good of an investment opportunity not to be taken advantage of.
- Deal flow review is taking up lots of resources
- The number of startups is skyrocketing. Investors need to review more cases, which means they spend much resources evaluating which startups to invest in.
- Raising funds from investors takes a lot of time for entrepreneurs. On the investor side, attracting and evaluating who to invest in also takes a lot of time – perhaps too much time. As many investors review the same companies, this seems like a waste of resources.
- Sand Hill Road (the street in Silicon Valley where most tech VC firms originated) was collaborative in the beginning. When there was almost more capital than good startups (deals) to invest in, it became highly competitive. In smaller markets like Norway, the VC scene should also be collaborative and investors should collaborate and share resources for deal flow attraction and review.
- More active management of portfolio companies
- Today´s entrepreneurs are expecting their investors to participate with opening their network and contribute in a much more active way than earlier to help the company grow. A more team-oriented approach between investors and entrepreneurs takes place in all stages.
- Concepts that couple entrepreneurial and scaling competence with capital much tighter are being established. In Silicon Valley, it is normal that VCs employ mentors, which they can spread across their portfolio companies. In smaller markets, there is little room for VCs to operate in this manner, so a need evolves to address the coupling of competence and capital in other ways.
- Successful entrepreneurs see they can build new companies through active involvement and become “birth helpers” of multiple startups at the same time. We have witnessed serial entrepreneurs who are aiming to start new companies as often as every 12 months over here. They have their pool of investors who follow them, and they leverage a rather fixed pool of developers to build several the solutions that become new companies. They are then staffed with mainly commercial resources and grown quickly. Their philosophy: “Good startups are not found, but made”.
- Corporate Venturing 2.0 under development
- Digital development is disrupting all industries. There is no need to convince anybody that we are living in an industrial revolution due to digital developments. So, all corporates understand that they need to do something to ensure they stay in business tomorrow. Fro some, corporate venturing initiatives is an answer to stay on top of digital developments and source innovation through investments.
- Big corporates have opened up to partnering and becoming clients of startups, as they see this as a source to stay competitive in a digital world. However, we have seen that some are stealing the startup´s business ideas, however they are most often quickly called upon by a strong and collaborative startup ecosystem.
- Corporate incubators are back. I spent the summer of 2001 at The Accenture Business Launch Center in Oslo, Norway, at a time where everybody wanted to accelerate or incubate the dotcom companies of tomorrow (the bubble had already burst in the US, but smaller markets like Norway was behind, and burst a few months later). We now see some of the same signals happening again, as both corporates and consultancies are setting up office spaces that allows startups to move in (often with much subsidised lease) and work closely with them.
It is obvious that the older financial vehicles are not keeping up with market developments. The financial vehicles created to invest in tech companies in the VC industry´s early days, are no longer compatible with today´s company lifecycles. So, there is a need to create new financial vehicles.
One item that I would have like to see on the list, is that we see an increase in more mature venture capital. However, that is unfortunately not the case. In Norway, there still are not enough incentives for investors to move from other investment types (like real estate and the oil sector) to startup investments. The mandates that several financial institutions and funds work under, also need to be updated.
In order to try to address this market problem in VC ecosystems, a former colleague of mine, Morten Wiese, and I started working on a concept to address this issue two years ago. The outcome has become an international collaborative venture hub for investors and their portfolio companies. We have taken the collaborative Sand Hill Road approach to the next level, so investors truly can be gathered at one location and truly collaborate.
Thanks to Norwegian Property, a real estate company with prime office locations on the waterfront in downtown Oslo, The International Venture and Scaling Hub Pier X, became a reality and opened at Aker Brygge this week.
Longterm we will establish the vehicles needed to ensure:
- Better access to capital: We need to enable that more capital is allocated to venture stages, and at the same time be an active contributor to decreasing the perceived risk it is in investing in growth companies
- Better access to scaling competence: Startups in the scaling stages should more easily be able to access competence and network that enable them to accelerate their growth outside our borders
If you work with any of the two things we are trying to solve, please ensure you send an application for a spot at the hub.
Hope to see you here!
PierX International Venture Hub is located at the waterfront at Aker Brygge in Oslo, Norway.
From the PierX International Venture Hub at Aker Brygge in Oslo, Norway. TV2´s Good Morning Norway studio in the back ground, who also shares the same space.