Big changes are happening in the venture asset class: SoftBank somehow wants to put $880 billion to work in the next 10 years; Sequoia (and the other flagship growth firms) are trying to figure out how to compete and are raising huge funds; Social Capital is trying to make going public easier through blank check companies at the same time it’s moving towards algorithmic funding through its Capital-as-a-Service product; startups are raising money via Initial Coin Offerings (ICOs); and so on.
Meanwhile, there’s a clear negative trend worldwide in early-stage investing (see Fred Wilson’s The Early Stage Slump post).
What are the impacts of the early-stage capital slump for a nascent startup community like Detroit?
If you’re unfamiliar with the “early-stage slump,” as Fred calls it, go ahead and read his post now and come back when you’re done for a discussion on how this impacts Detroit’s startup community.
First and foremost, secondary or tertiary markets like Detroit (and Michigan) have different characteristics and follow different market trends than the primary markets like San Francisco and New York City. Just as a small startup is often less affected by large macro trends than a mature company, Detroit’s burgeoning startup ecosystem is less impacted by the macro early-stage venture trends than mature regions like the Bay Area or New York.
In Detroit, we don’t have enough seed-stage investors, full stop. Our growth is constrained not by market trends, but by capital scarcity. And unlike many other mature markets, seed-stage firms haven’t moved upmarket; there are simply not enough firms yet.
The lack of seed-stage capital in Detroit continues to be a prime opportunity for outsized returns. And, as Fred says, “For investors, [the early-stage slump in general] means seed rounds are going to be the place to be. When others leave the market, it’s time to get in.” Or, as Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.” Looking ahead to the next four to six years, seed funding will provide the best returns in venture.
This will be especially true in a nascent market like Detroit, where valuations remain saner than the coasts, talent remains strong, and competition for deals is lower. Detroit investors should be able to continue to fund our best founders and see outsized returns.
Instead, our primary challenge is one of helping founders succeed and scale quickly. Primarily, that means capital and mentorship. Unfortunately, there aren’t many anchor tenants where future founders can cut their teeth to learn how to scale a business. San Francisco has plenty (Facebook, Google, Salesforce, Airbnb, Dropbox, and on and on); New York has some (Etsy, Warby Parker, Blue Apron, AppNexus); Seattle has a few (Microsoft, Amazon, Zillow, Expedia); but Detroit is lacking a standout. That means we need more mentorship by venture capitalists. Seed-stage VCs need operating experience that can help founders navigate the ups and downs of startup life. They need to be more than just a check; investors need to be a sounding board, a connector, a strategic advisor, a therapist, and more.
What about innovation in venture capital?
Much of the innovation and disruption in venture is most likely to impact later-stage companies.
(i) For example, the impending late-stage infusions from SoftBank, et al, will be a welcome addition for seed investors. SoftBank is now the world’s largest venture fund, with $100 billion in capital and an expectation to invest a total of $880 billion in venture capital over the next 10 years. It will provide significant liquidity to early investors (and employees) in an era that has investors sitting on large markups, but companies are delaying IPOs. Take the SoftBank/Uber tender offer, where early investors and founders like Benchmark and Travis Kalanick were able to realize a portion of their gains without an IPO while still retaining plenty of upside. This kind of arrangement is a win for early-stage investors looking for distributions while (anxiously) supporting their portfolio companies to run their best business.
All early-stage investors will benefit from late-stage capital infusions, but a nice added bonus for Detroit is that this will do two things: We will get
