Railway crossroads serve as a reminder that trains are not the premier form of transportation they once were. The same could happen to venture capital.
Heading into the COVID crisis, Silicon Valley had reached a consensus that venture capital was going to get hit hard. In March, as the market crashed with alarming speed, new investments came to a grinding halt, and the IPO market froze completely, it seemed the most dire predictions were coming true. Today, after navigating months of uncharted waters, it is clear these doomsday expectations could not have been more wrong. However, if the industry doesn’t tread carefully, its short-term gains could pave the way to long-term self-destruction.
Venture capital in 2020 has not slowed down, it has accelerated. Whether you look at median valuation, deal count, early stage rounds, late stage mega-rounds, or IPOs, third quarter metrics across the board have raced back to historic highs. The rebound has been fueled by continued favorable macro conditions, such as tech’s outperformance in the public markets, low interest rates, regulatory tailwinds, and the fact that entrepreneurship historically outperforms in economic recessions.
The real momentum, however, stems from the much-needed structural innovation that thrives in disruption. For an industry that claims to invest in the future, it has been a long time since VC funds have been forced to innovate. Whether it is AngelList’s rolling funds, the rise of YC-style accelerators for new fund managers, or the booming popularity of direct listings and SPACs, COVID has proven to be a platform shift not only for technology, but for venture capital itself.
For the most part, this innovation has been borne out of necessity and motivated by a desire to remove institutional gatekeepers that have inhibited efficient markets. It has also traditionally been these gatekeepers who kept the venture industry cloaked in mystery, only revealing its unwritten rules to the already well connected. However, without deliberate action, these new, emerging structures could merely perpetuate the Silicon Valley tradition that only winners get the chance to keep on winning.
Beneath the surface of the blowout top-line funding numbers, there is a troubling trend that female, diverse, or first-time founders and fund managers are the ones falling behind. It’s not surprising, considering a fully remote environment has forced people to dig deeper into their existing networks, rather than opening themselves up to new relationships. Yet again, those without pre-existing networks and reputations become inherently disadvantaged.
VC could suffer the same fate as trains, losing favor as a result of not innovating.
Venture capital is at a crossroads. New startups, technology, and private market investing are not slowing down anytime soon. Simultaneously, legacy structures have been shattered to pieces and the next generation is hard at work sculpting the replacements. Now is a critical time, while the clay is still wet, to build new cultural, regulatory, and policy frameworks that will permanently remove barriers to entry, not build new ones.
In order to do this, the industry needs successful founders and general partners to authentically share their playbook for success with the up-and-coming. Limited Partners must open their doors for new, diverse managers, not just those they have backed before. Policymakers need to prioritize removing structural barriers that prevent those without existing wealth to start investing and build their track records. Most importantly, investors need to be held accountable for diversity on their teams, as well as their portfolios and the boards they sit on.
As venture capital sits on the precipice of a new, exciting era of change and growth, the entire ecosystem must commit to embedding diversity and openness within its new infrastructure. Venture returns are fueled by systemic disruption, so long-term success requires supporting innovators who are often outsiders with non-mainstream perspectives. If that doesn’t happen now, the next generation will be spent like the last one: bolting diversity onto a system that was never designed for it in the first place. Or, even worse, the true change-makers will simply find another way.