Nowadays, a closely watched phenomenon is the growth and diversification of Andreessen Horowitz, one of Silicon Valley’s leading venture capital firms. Not only is it hiring dozens of new partners and employees, but it is also broadening its approach to the market, going well beyond the usual artisanal approach of early venture capitalists.
For a long time, these companies would just write a check in exchange for equity at some point – whether it was seed or Series A or beyond. Today, some of them are doing much more than that: investing at different stages, exploring new geographies and designing new financial instruments to adjust their offering to the specific needs of startups in sectors such as crypto, real estate, health, financial services and others. This makes sense because more often than not, startups now need more than equity: they also need debt financing, working capital, structured finance products, access to specific counterparties, and Moreover.
What if one venture capitalist could provide all of this to their “clients”?
Hint: it already exists
If we look a little further, we see that this model already exists: it’s called an investment bank! Financial behemoths such as Goldman Sachs, Morgan Stanley and JPMorgan effectively act as one-stop shops for their clients. They provide equity, debt capital, asset management, liquidity, sophisticated risk management, market research and opportunities for mergers and acquisitions.
If one company can do it all for its customers, then there are economies of scale on both sides. The more you are in contact with capital providers, the more you can tailor your offer to the specific needs of your customers. In the other direction, the more clients you have, the more you can market your portfolio of opportunities to those who can contribute capital. And you can already spot these networks at work in the tech world.
So it makes sense that the most successful venture capital firms are slowly transforming into a new breed of investment banks – the gatekeepers of capital markets for tech startups and tech companies.
“The most successful venture capital firms are turning into a new generation of investment banks – the gatekeepers of the capital markets for tech startups”
What today’s startups need
Compared to technology companies of the past, today’s startups have more diverse needs. For example, the rise in revenue-based funding, dominated by Pipe, Capchase, and Uplift1, has made SaaS-based startups realize that they can fund part of their efforts with non-dilutive debt capital rather than expensive equity capital. Could the same investment firm provide the equity to start the business and then the debt capital to finance its growth once the income is generated? American VC General Catalyst thinks so.
On the other hand, those with capital on their hands think that technology is the place where you can profit from disproportionate returns in the long run; therefore, they are looking for more exposure. As they realize that it is not always easy to access the best deals, they may begin to think about trusting an investment bank with large sums of money to deploy to its portfolio of. clients to generate the best returns.
It is therefore no coincidence that indexation, a concept long confined to the stock market, is becoming more and more visible in venture capital (see John Luttig here, and Tomasz Tunguz here). Instead of chasing a few deals a year, just trust a large established company with your money and let them index it across the entire tech market! A traditional venture capital firm can’t do this, but an investment bank does.
The tendency of small venture capital firms to transform into large one-stop shops is corroborated by traditional players, including the investment banks themselves, get into venture capital.
As the tech sector snowballs and demands more from the financial services industry, traditional financial powers are realizing that they can have a competitive advantage. There was no point in trying to compete with venture capitalists back in the days when venture capital was a small asset class dominated by a small group of artisans. But now that it has joined the big boys in the financial world, there is still a clear niche to be conquered: Goldman Sachs, but for the digital economy (which will soon become the whole economy).
Where does that leave Europe?
What about Europe? Can the Old Continent Grow Its Own Goldman Sachs for the Age of Entrepreneurship? Suppose the global investment banking market is one indication. In this case, the future belongs to American firms operating internationally, while European players will necessarily be confined to levels 2 and 3, centered on their domestic market.
To be fair, every investment bank in the world struggles to operate beyond its home market. Still, it’s a little easier for US-based players, who are backed by the US government from a regulatory standpoint and can thus access much larger pools of capital and deploy resources to more. large scale without exceeding critical risk thresholds. In this regard, Europe is too fragmented a market to give birth to its own financial behemoths. Regulations differ from country to country, as do cultures, customs and best practices when doing business. There will surely be one-stop shops in Europe, but they will never emulate their American counterparts and become global players.
“There will surely be one-stop shops in Europe, but they will never emulate their American counterparts and will never become global players”
Why will this be a problem? In short, European tech companies will lose a lot in terms of informational advantage and soft relationships in the process. In the absence of a European global player, they will be forced to choose one of two options: either dealing with American players with a global footprint but without too much skin in the European game, or with local players wishing to adopt a too parochial approach.
In recent years, there has been a lot of talk about the loss of advantage from the United States to China and other emerging entrepreneurial ecosystems. What we are reminded of by the rise of some US venture capital firms, however, is that the ability to develop large, diverse, tech-savvy financial firms capable of serving clients anywhere in the world is the surest way to long-term domination.
Nicolas Colin is co-founder of the venture capital firm The Family. He writes a regular column for Sifted.