I started SPiCE VC in 2017 when the VC market was hot and getting hotter. In fact, venture capital has been on a tear over the last three to five years. Even with a slight decline this year, the first quarter of 2022 saw global venture funding totaling an estimated $195 billion. Back in 2015, there were roughly 142 unicorns in the world. According to CB Insights, there are now 1,146 unicorns.
However, this VC success has led to frenzy, which inevitably has led to FOMO. In actuality, the entire VC space has moved to a constant state of FOMO, with funds of all sizes trying to get their hands on the next unicorn. Because VCs are jumping on opportunities faster in fear of losing out to another firm, the timeline for reaching conviction around a startup’s thesis and executing due diligence has become much more compressed than it ever was. This shortening of VC “courting” period poses risks for VCs and their investors.
In the market we invest in, which includes blockchain, tokenization and various aspects of the exploding digital finance ecosystem, it’s a bit more nuanced, but challenges still exist. Due to the mega hype prevalent in the blockchain ecosystem, there are a good deal of startups touting technology that’s looking for a problem rather than solving true existing problems. Additionally, unrealistic business cases, products that aim to solve very short-lived problems and solutions that rely on technologies or ecosystem components that will disappear all combine to create noise and distractions for novice investors. Identifying the real diamonds in this huge pile of shiny objects is not an easy task.
Due Diligence and VC “Courting”
The due diligence process for most venture capital firms involves extensive and in-depth research, including gathering market data, sifting through mountains of documents and financial data – all while getting to know the founders and executive team as best they can. Traditionally, this process would take anywhere from 6 weeks to several months (maybe longer), with 18 months being the average time a startup goes from one round to the next.
VC’s no longer have months to research a company and conduct thorough due diligence. In today’s hyper-competitive and frenetic landscape, VC’s looking to invest have much less time. If they’re lucky, they may have a few weeks.
FOMO Leads to Compression
In order to combat this compression of time, VCs have been forced to adapt, pivot and work smarter. Many are relying on data, while others are streamlining strategies that are focused on efficiency without sacrificing quality. While still others are looking at the due diligence process as a fluid, ongoing exercise, rather than a targeted one (i.e., VCs aren’t waiting to be pitched, but rather tracking and gathering insights along the way). However, this is all easier said that done.
For generalist VCs (firms that don’t have a niche vertical focus), the landscape to track is enormous and virtually impossible to monitor. This may make them less informed and more vulnerable.
Focus is a VCs Greatest Asset
For VC firms like SPiCE VC, which is hyper-focused on high-growth companies in the blockchain and tokenization space, the surface area of which it must search and track is significantly smaller than what many other firms are facing. That focus makes niche funds nimbler, and also provides them with the advantage of already fully understanding the market landscape, the technology, and the participating companies and players.
It’s clear that when a firm is already deeply embedded in the industry it’s looking to invest in, much of the tedious up-front work is done – making way for more time allowed to focus on the details that really matter: The company’s leadership team and skills, product and technology, business model, product market fit, go-to-market strategy etc.
Focusing On What Matters
Knowledge matters, relationships matters, data matters. The more a VC firm has of each of these, the better. And, in the environment of FOMO and compression, they matter even more because, when in possession and used effectively, it offers the gift of time.