If the last 15 years have been about the tech enablement of micro-VC, it feels like we now are very practical at the precipice of scaled micro growth equity. The difference is that if micro-VC was kicked off by communications tools and the variability of cost structures, micro growth equity is all about measurement. This will have a massive impact on the financial system in the next decade and beyond.
Inexpensive Analytics Opens Market for Small Companies
Historically, it was impossible for big investors to interface efficiently with small companies. Deploying large amounts of capital in million-dollar increments into small companies was never worth the effort needed to do the initial analysis and stay in touch with the progress of the company. At the same time, small companies could never afford to do the level of analysis and accounting needed for big investors to be interested.
But, as measurement gets cheaper and easier for everyone, this is changing. All of a sudden, series A investors are basically asking for and doing large leveraged buyout-style diligence.
Inexpensive access to serious data-warehousing platforms like Amazon’s hosted Redshift, visualization tools like Periscope and Mode, and massive amounts of inexpensive computing time are all driving cheaper access to capital.
It also helps that external measurement is getting far more accessible for everyone. I recently got demos of TXN (a Slow Ventures portfolio company) and Second Measure. Both are running inexpensive and efficient credit card data panels that let you externally track how companies are doing, much like Bain used to spend enormous amounts of money on (for lower-quality data, I might add). This is just another form of cheap, powerful and easy analytics tools that take risks off the table for investors and should make capital less expensive for operators that are winning (while rapidly washing out the losers).
Impact on the Venture Market
T Investors have always, obviously, tried to do diligence at all financing rounds. But series A investments used to be an exercise in a few top-level metrics a company might know, some industry interviews and analysis, and a whole lot of trust. The data that would drive capital market efficiency usually just wasn’t there, so capital was expensive and there were opportunities for financiers.
Financing is an intense level of detail in reporting and analytics. It can be that way because the companies have the data.
This might be frustrating to young operators. But, on the flip side, the fact they can provide the details to investors should mean far cheaper capital for those that are doing well.
What this means is that after a seed round, valuation prices can jump spectacularly much faster ever than before. When the metrics are there and the trust is there, investors can pull forward valuations much faster. This is great for operators but not so great for traditional VCs looking for several rounds of risk-adjusted discounts.
There are now two distinct forms of financing. One is before things are clearly working, where there are discounts. The other is after things start to work, where companies get very full valuations. The middle gradation is dropping out.
Some might say this has been the case for a while. Many of the top-returning branded venture capital shops are described by entrepreneurs as momentum-based, metric-following private equity sponsors in disguise rather than firms interested in opening new markets and taking real bets.
But my expectation is that as the analytics and metrics world gets more accessible, this game will be far more broadly distributed. So, if in some ways AngelList is the opening up of angel investing broadly, and seed capital has become largely a commodity, I would expect someone to start a growth equity list soon enough. That would mean more-efficient capital for companies that “have the numbers” early versus the current smaller number of players that do series A and series B investing.