NCFAs innovation and funding ecosystem

VCs are becoming modern-day investment banks

Sifted | Nicolas Colin | Oct 13, 2021

funding continues to evolve - VCs are becoming modern-day investment banksThese days, a closely watched phenomenon is the growth and diversification of Andreessen Horowitz, one of the most prominent venture capital firms in Silicon Valley. Not only is it hiring new partners and employees by the dozens, but it is also expanding its approach to the market, going well beyond the usual artisanal approach of early-day venture capitalists.

For a long time, such firms would simply sign a cheque in exchange for equity at a given stage — whether seed or Series A or beyond. Now some of them are doing much more than that: investing across various stages, exploring new geographies and designing new financial instruments to adjust their offering to the specific needs of startups in sectors such as crypto, real estate, healthcare, financial services and others. It makes sense because, more often than not, startups now need more than just equity: they also need debt financing, working capital, structured financial products, access to specific counterparties and more.

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If we look a bit more broadly, we see that this model already exists: it’s called an investment bank! Financial behemoths such as Goldman Sachs, Morgan Stanley and JPMorgan effectively act as one-stop shops for their clients. They provide equity capital, debt capital, asset management, liquidity, sophisticated risk management, market research and opportunities for mergers and acquisitions.

If a single firm can do it all for its clients, then there are economies of scale on both sides. The more capital providers you’re connected with, the more you can tailor your offer to your clients’ specific needs. In the other direction, the more clients you have, the more you can market your portfolio of opportunities to those who can provide capital. And you can already spot these networks at work in the tech world.

It is logical, then, that the most successful VC firms are slowly morphing into a new breed of investment banks — gatekeepers of the capital markets for tech startups and tech companies.

“The most successful VC firms are morphing into a new breed of investment banks — gatekeepers of the capital markets for tech startups”

What today’s startups need

Compared to the tech businesses of the past, today’s startups do have more diverse needs. For example, the rise of revenue-based financing, dominated by the likes of Pipe, Capchase, and Uplift1, has made startups offering SaaS products realise that they could fund part of their endeavour with non-dilutive debt capital rather than costly equity capital. Could the same investment firm provide the equity capital to kickstart the venture and then the debt capital to fund its growth once revenue flows? American VC General Catalyst sure thinks so.

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On the other hand, those with capital on their hands feel that technology is where you can enjoy outsized returns over the long term; therefore, they’re seeking more exposure. As they realise it’s not always easy to access the best deals, maybe they’ll start thinking about trusting an investment bank with large amounts of money to be deployed across its client portfolio to generate the best returns.

It is no coincidence, then, that indexing, a concept long confined to the stock market, is becoming more visible in venture capital (see John Luttig here, and Tomasz Tunguz here). Instead of chasing a few deals a year, just trust a large, established firm with your money and let it index it on the entire tech market! A traditional VC firm can’t do that, but an investment bank does.

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NCFA Jan 2018 resize - VCs are becoming modern-day investment banks The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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