Summer rolls on...

As many of our readers will be enjoying a well-deserved break, whether it be on the beach or by the poolside, we have taken the opportunity to put together a summer reading list. The articles below have helped to shape our thinking within the venture capital space, in terms of analysing investment managers and the various fund offerings. We hope you enjoy reading them as much as we have and that you are well rested ahead of the second half of the year as the fundraising season begins.

Please note that, whilst all of these articles are available for free, you may be required to sign up in order to access them.

Venture Capitalists Who Work Together Increase Success Rate – Professor Joost Rietveld

A common topic of discussion has always been whether venture capital firms that collaborate on investments, make these ventures more likely to succeed. New research, from the UCL School of Management, concludes that venture capital firms are more likely to generate successful results in the short term if they collaborate with other VC firms. Prof. J Rietveld, along with co-authors from Europe and Australia, reports that working together on syndicated investments can reduce the risks of investors acting selfishly or sitting back and allowing a colleague to do most of the work. However, it should be noted that the authors believe long-term collaboration can lead to its own set of individual risks. Additionally, the research brings to light additional factors that need to be considered by VC firms before they collaborate, including, amongst others, geographical location and the age of the investment in question.

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Risk Management for Venture Capital Firms – Ricardo Taveras

The author of this article, Ricardo Taveras, has formulated a dynamically enhanced, strategic process for risk management for venture capital firms based on enterprise risk management strategies and techniques. Taveras utilises statistics from a ten-year study undertaken by the Harvard Business School and, along with outlining his approach, also explains why 70% of venture capital-backed start-ups in the ten-year span failed. In assessing reasons why start-ups are successful, Ricardo concludes that start-up failures are derived from the decisions that the start-up companies make. The article provides a detailed table explaining the three major risk factors, namely strategic, operational, and financial, and goes on to explain the four aspects of the enterprise risk management cycle for venture capital firms. Taveras states the four parts as: Risk Identification, Risk Quantification, Risk Decision Making, and Risk Messaging. They are illustrated with examples and detailed explanations to help explain how the factors play a role in successfully managing risk within a venture-backed portfolio company. This article is useful if you wish to gain insight into why portfolio companies/start-ups fail.

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A Stats-Based Look Behind the Venture Capital Curtain – Eric Feng

This article starts with an account from the author Eric Feng, an entrepreneur and co-founder of Packard, of how he and a colleague have noticed the huge increase in investors in the venture capital space over the last fifteen years. The number of investors continues to grow at a faster rate year by year. Eric spells out that, from 2003 to 2011, an average of seventeen new funds was raised per year. However, from 2012 onward, that average rose by an impressive 42% to 223 new firms. Eric states that the rate at which non-seed funds launched each year has been relatively stable for the past fifteen years, at an average of ninety opening per year. By contrast, the number of seed funds saw a dramatic jump over the last seven years, with the current number of seed fund launched being multiplied by 2.3 times. This significant increase now means that 60% of all new funds launching each year are accounted for by seed funds. Eric goes on to discuss how, in the past fifteen years, the amount of capital invested by US-based VC firms into start-ups grew more than four times to almost $85 billion dollars in 2017. The explanation for this growth is simple, for the author: investors have been busy investing. There are now three times as many funding events as there was fifteen years ago. However, this is only the investing side of things. The total number of exits has increased two-fold in the past fifteen years, whilst the value of those exits has tripled, averaging $50 billion per year since 2015. However, according to the author, this figure could be misleading, as we should be considering the measure relative to investments, not in absolute terms. After Eric's assessment, he claims that returns on investments are roughly the same now as they were 15 years ago, despite the VC market having three times as much capital at work, due to the rapid growth of the industry. Reflecting on the original question posed by the article, 'why has the number of investors grown so much?', the author concludes that, though it has become harder to identify greater investment opportunities, start-ups are more transformative, successful, and valuable than ever before, hence growing interest in this space.

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Does Europe Need Venture Capitalists Who've Actually Ran Start-Ups? – Amy Lewin

In the United States, 60% of venture capital firms have experience with start-ups. However, in the United Kingdom, only 8% of venture capital firms have first had experience of working within a fast-growing company. According to a new report from non-profit, Diversity VC, UK venture capitalists are much more likely to have spent years in consulting, finance, or investment banking. The article gives examples of firms which have adapted an entrepreneurial approach to their investment strategy. For example, European VC Cherry Ventures, has adopted the tagline, "We are entrepreneurs first. And investors second". A further example given is that of Blossom Capital, a London-based firm, which has a similar tagline: "We are entrepreneurs, just like you". The partners at Blossom Capital have all founded or worked at fast-growth businesses such as Deliveroo and Klarna. The author concludes that you should not hire someone based solely on the job roles they had done in the past; instead, you should hire them based on skills, insights and energy that they bring to the team and the job at hand.

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