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Alternative Venture Capital vs. Traditional Venture Capital

    
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For decades, venture capital has followed a very traditional script: large tech companies such as Facebook and Twitter engaged in several rounds of financing with major firms before going public. However, the startup revolution of the 2010s has changed the world of venture capital, forcing firms to adapt to this new landscape.

In this article, we’ll discuss some of the ways that alternative venture capital is changing the game.

1. Greater due diligence

A few years ago, it was much easier for new startups on the scene to get funded. There was a lot of capital to be handed out and plenty of VCs to go around. Now, however, the tech startup market is becoming increasingly saturated, with many similar products and services fighting for breathing room.

This isn’t helped by the fact that the stock of tech industry titans such as Uber, Spotify, and Slack have all underwhelmed since their IPOs. 

In the face of these challenges, VCs are increasingly asking for strict due diligence processes, performing detailed analyses of the underlying assets and technology that startups have to offer. What’s more, many VC firms are using AI and machine learning techniques to identify the most promising investment opportunities, helping to remove human biases from the equation. For example, the company Social Capital has built a data-driven engine called “Capital-as-a-Service” that evaluates the potential of VC funding applications, with decisions returned in as little as a few days.

2. New players and locations

The tech-focused startup VC scene of the past decade has mainly been dominated by a few major firms in Silicon Valley, such as Sequoia Capital and Accel Partners. However, alternative venture capital has led to the rise of new players and investment models—in particular, corporate venture capital (CVC).

With corporate venture capital, corporations themselves invest funds in external companies. Some of the most prominent CVC firms include GV (formerly Google Ventures) and Intel Capital, both of which invest in promising tech startups.

CVC has grown massively over the past decade, from $11 billion in 2013 to $57 billion in 2019, and 75 percent of Fortune 100 firms now have their own CVC arm. Thanks to the rise of CVC, choosing the right venture capital partner means that you’re not necessarily constrained to dealing with a small handful of traditional VC firms.

The arrival of alternative venture capital has also meant that VC firms are becoming increasingly decentralized, spreading out from the nexus of Silicon Valley. Between 2012 and 2017, Bay Area venture capital investors partnered with local companies 66 percent of the time; only 22 percent of relationships were with companies outside the West Coast.

However, initiatives such as the Rise of the Rest seed fund are shaking things up by investing in companies outside the traditional startup hubs of Silicon Valley, New York City, and Boston. In 2019, CVC investments in these three startup hubs practically stalled, while investments in “other” locations were up by 12 percent from 2018.

3. Different support models

The traditional VC model of cash for equity is increasingly outmoded, as venture capital firms recognize that startups may appreciate assistance in different arenas as well. Instead, many VC firms are offering their help kick-starting businesses and providing critical insights and acumen. 

For example, India-based Orios Venture Partners has launched a #Misfits scale-up program for fledgling startups, helping them raise more funding, grow the business, and hire the right talent. Some venture capital firms have even brought startups virtually in-house, akin to an accelerator program, offering them pre-built sales, marketing, and HR departments. By investing more than just cash, VC firms have found that they get a better ROI and decrease the risk that their investments won’t pan out.

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