Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
VCs are becoming modern-day investment banks
Sifted | Nicolas Colin | Oct 13, 2021
These 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.
See: European Government Funds May Get Distributed by European Crowdfunding Platforms
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.
Read: Doug Ellenoff on US Reg CF Increasing Issuer Caps to $5 million: Investment Crowdfunding Will Challenge Traditional Venture Capital
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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