What will the next decade look like for venture capital? The VC industry had different drivers over the past five decades—from defense in the 1970s to PCs in the 1980s to dotcom in the 1990s to cloud in the 2000s and mobile in the 2010s. The nature of VC firms has also changed dramatically from small partnerships to large, multi-billion dollar institutions.
We see eight trends that will shape the next decade of venture.
Given the success of venture capital as an asset class, we expect its growth to continue. Even if there is an economic slowdown, the success of the past decade has left limited partners with plenty of spare capital to reinvest in new, bigger funds. More assets will be invested in VC this decade than last, and we expect the first $10 billion VC fund within five years and the first $20 billion fund by the end of the decade. (We’re excluding Softbank’s $100 billion Vision Fund from this theme since it’s an outlier and, because it’s a part of Softbank, a special case.)
Much of that expansion will be outside today’s big VC markets. The industry is dominated by firms and investments in the US, China, and Europe and has only begun to expand into markets like Africa, South America, and Southeast Asia. We see impressive talent in each of these markets and expect the venture capital industry to expand to serve them over the next decade.
Asset growth will likely lead to bigger and more widely dispersed teams within venture firms. The asset growth of the past decade has already changed some old-school firms: NEA has grown to a team of over 100 people and Sequoia has nine offices in five countries.
As venture firms grow—in assets, investments, and employees—their role will also change. We expect the trend of providing operational support and services to portfolio companies to continue. Many firms are already investing heavily in service offerings—most notably Andreessen Horowitz. Of the firm’s 180 people, 120 provide services like market development, human resources, and operations to the companies the firm has invested in. According to Izhar Armony of CRV, “The world is moving more towards more involved, more institutional value creation.” We agree and expect this trend to continue with service offerings becoming “table stakes” for venture firms.
Despite the venture industry’s focus on identifying new innovations, the industry itself has seen very little of it in its own product over its first 50 years. From the beginning, the venture industry has provided capital by purchasing equity and, to a lesser degree, provided loans to companies through convertible debt (a form of debt that converts to equity given certain conditions). In 2013, Y Combinator released a simpler type of investment for early-stage companies, appropriately called the Simple Agreement for Future Equity (SAFE). This innovation created a new way for investors and companies to invest at the idea stage which has made seed investing faster and easier.
What’s next? There’s a lot of buzz around revenue-based investing (RBI), a convertible debt product that requires companies to pay back a loan based on a percentage of revenue. Founders find this financing attractive because the payments increase or decrease based on how much revenue the company makes and because it allows them to pay back an investment while retaining their ownership. Investment firms like Indie.vc, Lighter Capital, and TinySeed are attempting to grow exclusively with RBI and we expect them to be successful.
That said, RBI only works for companies that don’t need or want large amounts of capital, so don’t expect many unicorns to come from the RBI model. We expect RBI and other convertible debt products to help venture firms invest in companies that wouldn’t normally pursue a venture investment. These investment products will remain a minority of capital invested.
The late-stage venture market has been flooded with capital as companies stay private longer. While staying private longer can be advantageous for companies, private investors don’t have the same disclosures and protections as public investors. We expect innovations will help bridge this gap, providing better information to investors and holding startup management more accountable. Given the scale of issues at some companies—most notably WeWork—we wouldn’t be surprised to see some big, late-stage funds start demanding increased transparency and better governance. In particular, we could see firms like Fidelity and Wellington that are primarily public-market investors start placing higher expectations on their portfolio companies.
We think diversity is essential for the continued success of the venture industry. For decades, a small group of white men were successful in investing in companies largely started by other white men in a small number of locations and industries. As the industry scales, it will need to get more diverse to find a larger set of successful investments.
We expect diversity of all kinds — including gender, race, geography, and industry — to increase gradually within the venture industry. Nothing changes quickly in venture firms because of the 10-year lifetime of the funds they manage. People who sign up to manage a new fund do so for 10 years. The focus of their investments (i.e., geography, industry, stage) is set in the terms of the fund so that doesn’t change for 10 years as well.
The younger generation in venture capital is more diverse and they are focused on more diverse investments. For instance, Vanessa Larco, who started in venture three years ago, has started a new investment initiative focused on women’s health at her firm, NEA, and is focused on non-standard geographic markets, both in the US and outside it. (For more on diversity in VC, see this piece of the field guide.)
We expect the biggest change in venture capital exits to be an increase in sales to other private investors. These secondary sales have already grown as the number of IPOs has shrunk and venture investors have sold companies to private equity firms rather than the public markets. We think that Ravi Viswanathan’s founding of NewView Capital will prove to be a pivotal moment. Ravi left his position as a general partner at one of the largest venture firms in the world, NEA, to create a new firm centered around a mandate to purchase investments from other venture investors. The limited-partner market clearly believes in Ravi’s plan since he was able to launch the fund with $1.3 billion in capital.
As startups stay private for longer and as the investment world wants to put more capital into private companies, it makes sense that more funds will follow NewView’s path to purchase stakes from early-stage investors with the hope of realizing a gain as startups continue to grow as private companies. The big risk is that private companies do not have the disclosure requirements of public companies, making it harder for investors to identify issues and avoid investing in companies that aren’t performing as well as they say they are.
Throughout 2019, we highlighted the issues with founder control in unicorn IPOs (here, here, here, here, here, and here). It’s understandable that founders would ask for outsized control of their companies since there are plenty of examples of venture capitalists removing founders from their startups. We have been surprised, however, at how often venture investors have gone along with the request, essentially removing the governance control that they have through their preferred shares. Some say this is the effect of a more competitive environment where investors have to compete to make an investment in the best companies. Others say this is the effect of founder idolatry. Whatever the cause, founder control has proven to be a mistake in many companies — including Theranos, Uber, and WeWork — and it has created a headache for venture investors when they have tried to wrestle back control in order to expel an ineffective founder.
We expect the power to shift back to investors over the next decade. While there may always be an investor who will go along with founder control, we predict the best venture investors will start saying “no” because it’s just not worth it. The era of founder control started with Larry and Sergey at Google and Mark at Facebook but we think it will end with Adam, Elizabeth and Travis.
The venture industry funded the PC industry which put machines on every desktop, the internet industry in the 1990s which aggregated the world’s information, and the cloud and mobile industries in the 2000s and 2010s which gave everyone access to all that information on those devices. We predict the next phase of venture will be dominated by applying artificial intelligence to all of our cloud and mobile applications, making them smarter and, hopefully, more helpful. The venture industry may be approaching its biggest opportunity yet by adding intelligence to a forecasted 100 billion internet-connected devices by 2035, serving a potential internet audience of 8 billion people. Creating AI-powered products and services that can learn and have agency to act offers huge potential, but it also creates new technical and ethical risks for the venture industry to navigate.
There’s already a lot of concern about how automation and AI will affect individuals, companies, and societies—as there should be—and the venture industry will need to navigate these ethical boundaries carefully. Venture has, so far, been seen as a source of great innovation that has advanced society, but the industry risks becoming a source of serious harm as the companies it funds are accused of destroying privacy and increasing inequality, economic precarity, digital addiction, and polarization. We expect that ethical investing will become a differentiator in the next decade and the most important institutional LPs—state investment funds and endowments—will start preferentially allocating assets to investors who focus not only on making money but commit to ethical standards.