The U.S. venture capital industry just capped off one of its biggest years ever. But look closer, and the current funding environment could spell trouble for the next wave of high-tech startups.
The $84.2 billion invested in 2017 is a level of VC funding unseen since the dot-com era of the early 2000s, according to data from the Venture Monitor report prepared by Seattle-based PitchBook and the National Venture Capital Association. But that money was spread across 8,076 deals, down from 8,635 in 2016 and 10,463 in 2015, per Venture Monitor data.
The takeaway? Investors are pumping more money into fewer companies—many of them later-stage ventures.
There’s a widening funding gap at the earliest stages of innovation, says Jeff Fagnan, a Boston-area partner with tech venture firm Accomplice. Even seasoned “angel” investors and “micro-VC” funds are shifting their strategy to back more later-stage ventures, he says.
“We see a vacuum there,” Fagnan says.
Accomplice’s latest attempt to help fill that void is Spearhead, a $35 million fund that is sort of a cross between a fund-of-funds and an accelerator program.
Over the next two years, Fagnan says, Spearhead intends to provide around 80 North American entrepreneurs with between $200,000 and $1 million each to invest in technology startups at the “pre-seed” level. The organization will also provide mentoring and other resources to help train newbie angel investors. Accomplice’s partner in Spearhead is AngelList—the online platform for finding startup jobs and making angel investments—which will handle back-office duties for the deals, like legal and accounting. Accomplice is the largest investor in the Spearhead fund, alongside several other backers from its network, Fagnan says.
Spearhead is the newest non-traditional venture fund from Accomplice, which has been one of the VC industry’s more active experimenters in recent years. In 2013, Accomplice and AngelList created Boston Syndicates (BOSS), which facilitates early-stage investments in Boston-area companies by a network of local entrepreneurs and angel investors. The next year, Accomplice launched Maiden Lane, an online-only venture fund that backs syndicate deals on AngelList. (Accomplice was an early investor in AngelList itself.) Maiden Lane’s $25 million debut fund has invested in Cruise Automation and Opendoor, among others.
Accomplice raised $35 million for a second Maiden Lane fund, but ultimately decided to go in a different direction and use that money for Spearhead, Fagnan says. Dustin Dolginow, an Accomplice venture partner who helped create and run Maiden Lane, says in a LinkedIn post that he is leaving Accomplice at the end of January, but will work part-time on Spearhead while he plans his next move. Accomplice has been going through some turnover in the past year; other moves include the hiring of partner Cack Wilhelm in San Francisco and the departure of Chris Lynch and Cort Johnson in Boston.
Spearhead is a culmination of some of the lessons learned with BOSS and Maiden Lane, Fagnan says. Younger entrepreneurs—such as those who are working on their first venture-backed company and haven’t achieved an exit yet—often have strong access to (and well-informed judgment of) other promising early-stage ventures, Accomplice says. These entrepreneurs are typically already providing informal advice and mentorship to their peers, but they might not be making personal investments in those startups, perhaps because they haven’t accumulated enough wealth or they aren’t accredited investors. Spearhead plans to target these entrepreneurs and would-be angel investors, giving them a mechanism and support to potentially profit from the mentorship they’re providing.
“We are skewing to people that do not have the bank accounts today that make them think of themselves as wealthy enough to be an angel investor,” Fagnan says. “We’re going to build you into an angel investor.”
Each person selected for Spearhead controls the pot of money he or she receives through the program, and gets to keep 15 percent of his or her individual fund’s profit. Participants must follow a list of basic investment criteria, but in general, Accomplice and AngelList will not have a say on deals.
Part of the goal with Spearhead is to back a diverse group of budding investors. That includes women and people of color, as well as people with different professional backgrounds who are located across North America, says Wilhelm, who is working on Spearhead along with Fagnan and AngelList’s Naval Ravikant and Jake Zeller.
Spearhead plans to run two training programs per year, and it will initially target investors in San Francisco, Los Angeles, New York, Boston, and Toronto, Fagnan says. The program could expand to other cities, such as Chicago, Seattle, Washington, DC, and Austin, TX, he adds.
“Other communities deserve to have a healthy ecosystem, besides San Francisco,” Fagnan says.
Spearhead might surface companies that Accomplice will want to invest in, but Fagnan says sourcing deals isn’t the main objective for his firm. Rather, he says the idea is if there are more angel investors backing quality, young ventures in various cities, that will create a “network effect” and “by nature, we’re going to do very well by it.”
Fagnan says he is “worried” by some of the macro investing trends, such as VC firms raising larger funds and focusing on later-stage deals, and venture-backed companies staying private longer. He’s not sure how all of this will impact early-stage startups in the long run.
“I think we do need new types of programs like Spearhead to fill these gaps,” Fagnan says. “We’re going to have to see what happens.”
