Venture Capital

The VC industry is in a constant state of flux as a result of bear and bull markets, government legislation, business trends, the emergence of competing funding sources, changes in VC firm organizational structure, and many other factors. Additionally, some investment sectors remain hot, while others (such as clean tech) have their moments in the sun before the next “big thing” comes along. One hot sector in VC is funding for artificial intelligence (AI). In 2019, 1,356 AI-related start-ups in the U.S. raised $18.457 billion, according to the PitchBook-NVCA Venture Monitor, Q4 2019. This was an increase from 1,281 start-ups that raised $16.8 billion in 2018. Venture capital firms are also using AI and machine learning to better manage data and improve efficiency regarding deal sourcing, funding decisions, and other operational areas. For example, the early-stage VC firm Connetic Ventures has created Wendal, which uses proprietary data and machine learning to automate the pre-screening process for companies seeking funding. In 10 to 15 minutes, Wendal interacts with applicants to collect and assess all of the information that it needs to decide to move to human due diligence or pass on an investment. The use of Wendal has reduced human-based bias in the screening process and increased opportunities for female and minority applicants. Venture capital firms are also funding startups that are developing blockchain technology, which is a distributed ledger database that uses advanced cryptography to maintain a continuously-growing list of financial records that cannot be altered. Finally, the rare disease and orphan drug startups sector remains strong. (Orphan drugs are pharmaceutical products that are used to treat rare diseases.) PitchBook reports that “VCs and pharma giants are pushing resources into early-stage [rare disease/orphan drug] opportunities because, as is the case in quite a few other industries, a near-monopoly in a niche space is better than fierce competition in a larger market.” In addition to hot investment sectors, new operational strategies are emerging. For example, the special purpose acquisition company (SPAC) is increasingly being used as an alternative way for companies to go public. “Proponents of SPACs contend they can provide a streamlined approach with a better onboarding process to going public, easier mechanics for creating the board and management processes, more direct dialogue with investors over a longer period of time, more transparency for the company purchased by the SPAC, and broader wealth creation,” according to PitchBook-NVCA Venture Monitor Q3 2020. “Ultimately, time and the market will determine if SPACs are a fad or if they are here to stay.” These are only a few of the trends and developments that will shape the future of the VC industry.