Vision on the future of venture capital

The pandemic has exposed value chain fragility and stress-tested all sectors and industries. Innovation has become the new arms race. According to Mc Kinsey Global Research of Executives companies have accelerated their digitization by three or four years and the share of digitally enabled products in their portfolio has accelerated by a shocking seven years since Covid-19 hit in early 2020. The European tech-ecosystem has thrived as a result. According to the latest Atomico report on the State of European Tech 2021, Europe is solidly positioned as a global tech player in 2021, with a record $100 billion in capital invested, 98 new unicorns, and the greatest start-up pipeline in history, now on par with the US. Since the onset of Covid-19 two long years ago, venture capital-backed technology companies have exceeded all expectations and played a significant role in driving the economic recovery. Competition for the best deals is intense and valuations are being pushed up significantly as a result. Despite these skyrocketing developments turmoil in larger tech stocks appears to be spilling over the fintech market. Buy-now-pay-later giant Klarna for example is looking to raise fresh funds for a 30% discount to its previous $46 billion valuation. Next gen digital behaviors and the instable macro-economic situation drive an upcoming revolution in venture capital: an AI driven structured start-up investment revolution!

Breakthrough: Think data-driven from intrinsic start-up value

 Currently start-up valuations drift. Public company valuations are slashed as being seen in the Klarna example, but private company valuations still have appealing revenue multiples. There is a paradox in startup investment! In the companies I have been involved in, we have been doing a great job from a shareholder point-of-view. But, from a management point of view raising venture capital was a frustrating and value destroying experience. Next to the huge amounts of time it took to raise, there was a mismatch in the moments of raising. In bad times no one wanted to invest, in good times, now we have facilitated over € 4.5 billion in credit, everyone wants to invest. The paradox is that where VC’s say to have a superb focus on value creation, their risk averse investment decision making usually is a big value destroyer for the portfolio companies! The paradox is caused by a friction between shareholders and management perspectives. Being a start-up founder for twelve years now I have experienced that several times. A decade ago, I raised a series A venture capital round for my super early stage mortgage robo-advice platform eyeOpen before I sold it to Aegon Transamerica two years later. The time between inception and closing of the raise was about 9 months in which I was fully occupied with the fund raise. The new owner integrated the platform with their online bank to service a multi-billion mortgage portfolio billion according to their 2021 annual report. Great shareholder value, but nine months of waisted customer value creation time for an early-stage company. A few years later, with my credit-decision-as-a-service company AdviceRobo I wanted to do it differently. To develop a higher valuation and reduce timelines of investment, we invested many millions in the company ourselves before we went out to the venture capital market. But, despite having a great value proposition that was scaled to three countries at that time, the venture capital investors behaved similarly. Again, the full fundraising process took me nine months.

VCs prove to be pretty risk averse, opinion based and being led by elements of crowd mentality. Would VC’s focus more data-driven on the intrinsic value of a company and its assets, this would win several years in value creation of future unicorns. So better ROI too! As I noticed the exact same experiences with my colleague fintech entrepreneurs, I wondered: “Why is fund raising such a time-consuming investment process for companies in a phase that they need to focus on customer value creation?” And “Why venture capital investors do not see the potential of start-ups in times when it’s needed?” Often, just as with my companies, the underlying facts of success are present already from the beginning: an experienced team with a great track record, a multi-billion market and a differentiating AI & alternative data value proposition! The answer I found was that they simply couldn’t because of their risk-averse and traditional decision-making approach. They simply did not have the right data nor tools to judge underlying early-stage company value well, so they relied on traditional risk mitigating investment views and approaches. This all leads to traditional and poor results. Only 10% of start-up investments generates an appealing return on investment. About 30% is around break-even and 60% is mis-invested. Translated back to the € 100 billion European venture capital investments in 2021, this implies that only € 10 billion was invested well and € 60 billion was completely wasted. In a world which is flooded by young start-ups and where waste reduction is an important ESG-principle, this must change.

Improve Venture Capital investment return with 40%

But there also is another driver of change, as millennials and Gen Z start more businesses than all other generations before. This flood of new start-ups combined with the unstable macro-economic environment makes it increasingly difficult and expensive to decide in which start-up to invest in and in which not. Traditional manual processes and expert decision making will become obsolete. Maturity of AI and data tech therefore are revolutionizing early-stage venture capital investors. That is, the big ones who have the portfolios to build data-driven approaches. The zillion mid and smaller start-up investors are simply left behind!  That’s why we are now scaling the AdviceRobo AI platform from credit decision making into startup investment decision making too. To detect and support new next gen unicorns super early at times when they need financial injections most. With all the learnings we developed on AI driven structured small business credit decision making, we aim to revolutionize start up investment decision making in the upcoming decade too.  And we are not alone! Revolut’s Nik Storonsky for example recently announced structured decision making in his new € 200 million structured Quantum Light Capital Fund.

It’s a win-win game for both the start-ups and the venture capital investors. A revolution which we can lead from Europe. European startups attracted € 26.8 billion in funding in Q1 2022 according to CB Insights. If we extrapolate this, 2022 will be another record breaking start up investment year. The question more than ever is which investors are the smartest in picking the start-ups earliest from the flood of next gen companies? I bet you, structured venture capital investors will be the winners in the upcoming decade. Just as in credit decision making, they will outperform the market with 20% - 30% higher hit rates of new unicorns and 15% - 20% lower mis-investments. What an opportunity that is to revolutionize the access to early-stage capital market by removing traditional focus and friction!