Venture Investing Trends In 2011

Without question, there will continue to be opportunities and the seed/Micro VC and growth capital ends of the continuum. Capital will continue to flow into these areas and over the next 12-18 months the transformation from buyers market to sellers market will be complete. This will be manifest through rising valuations at the low end ($250-$1 million rounds, as Jon Callaghan defines it in an answer on Quora) and the high end ($10 million+). 

The area where I take issue is that there is truly a dearth of Series A capital. This has not been my experience. If seed stage deals are priced properly, and if price expectations for the Series A are reasonable, I know dozens of firms that would eagerly jump on these opportunities. The problem is where Series A valuations get ahead of themselves, making them a worse risk/reward trade-off than either seed or growth stage-sized checks. This is not what I am seeing currently, however, and there is billions of committed capital sitting on the sidelines available to do these deals.

So, in summary:

  • There will continue to be a proliferation of seed stage Micro VCs in 2011 – let’s call the phenomenon The Institutionalization of Angel Investing.
  • 2011 will continue to witness big dollars flowing into late-stage venture, providing a viable alternative to IPOs for smaller (less than 500 shareholders), rapidly growing companies. Let’s call this trend Public Capital in a Private Format.
  • Series A rounds that are not led by institutional investors participating in the seed stage may get off to a slow start, but will pick up steam as 2011 progresses as they become the most attractive risk/reward trade-off along the venture investment spectrum. As seed and growth round prices get bid up do to a massive influx of capital, traditional VCs will get busy deploying their vast committed capital bases into Series A and B rounds. This will result in A Return to Risk/Reward Equilibrium in Venture investing.

Contrarian, yes. But if the history of financial markets are any guide, as soon as most people are leaning in one direction (seed, growth) the other vector (Series A/B) will almost certainly take hold

This post originally appeared at Information Arbitrage.


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