Venture 'Rules Are Changing' as Funds Aim Beyond Unicorns (FundFire)

On August 26th, Laconia was featured in FundFire’s article, Venture 'Rules Are Changing' as Funds Aim Beyond Unicorns , examining various paths being taken by venture managers in pursuit of outsized returns.

Here are some highlights from the piece:

The piece drew a clear distinction between larger venture managers searching for the next unicorn, and “upstarts” such as Laconia and Boston-based Hyperplane, “which invest more deeply in early stage startups across their portfolios – similar to the operational “value creation” focus that buyout firms use to improve established companies”. These new model emerging managers are “aimed instead at helping entrepreneurs build profitable, sustainable businesses.” 

• Theresa Hajer - Cambridge Associates, MD of Venture Capital Research:

“We’re looking at some of the emerging [venture] managers taking a new approach to access opportunities that the more established firms are not focused on or not built to capitalize on”

• Jeff Grabow - Ernst & Young, U.S. Venture Capital Lead

 “The larger the size of the fund, the more you have to make sure you hit that fund-maker to deliver returns”

We (Laconia) had the opportunity to contribute our perspective on the topic, sitting down virtually with Associate Managing Editor, Tom Stabile to discuss the nuances of our approach, how we execute, and benefit of a more hands-on approach with founders and portfolio companies during the early stages. As our partner Geri Kirilova noted, the ability “to spend greater time and attention to help smaller startups develop good business practices – and solid organizations and teams – at the early stage” is critical to our ability to create value and drive better outcomes for founders and LPs. Laconia strives to enhance outcomes through operational execution, sales acceleration, and capital strategy, thereby reducing early stage risk.   

Note - FundFire is a subscription based news service, the preceding is a synopsis.

Emerging Venture: Beyond The Headlines

To many, venture capital is what is seen in the headlines - unicorns, mega-funds, runaway valuations, and hoodie-clad tech-titans cruising the Valley on scooters. But at its very core, venture capital could not be further from this image. Venture is where capital meets innovation, primarily outside of the headlines, touching every corner of our personal and professional lives: how we eat, communicate, exercise, commute, work, and travel. This makes it a critical asset class for investors with long-term investment horizons, but it also demands deliberate strategy, structure, and process to properly allocate capital and manage risk.  

Not every venture deal, however, results in a blockbuster $1B+ IPO. The reality is actually quite to the contrary. Over 90% of 2018 exits came via M&A transactions, of which 83% were sub-$500M [1]. This suggests a deep opportunity set of “sub-unicorns”, putting smaller funds and often, emerging venture managers, at the forefront of the innovation curve and enabling them to stealthily deliver outsized alpha to those who wish to look for opportunities between the cracks in this vital but often fragmented and opaque asset class.   

Emerging venture firms, though perhaps not yet household names, are doing the digging and nimbly deploying smaller pools of capital while leveraging strategy, structure, and process to create value through hands-on engagement with entrepreneurs. Data shows this grassroots approach is generating attractive returns relative to larger funds and more established brands. In a recent study completed by Canadian Technology Accelerator, top-quartile venture funds <$249M generated IRR of 39% versus IRR of 33.6% ($250M-$999M funds) and 9.9% ($1B+ funds) [2]. This engaged approach is fully aligned, free enterprise innovation in its purest form. It is also miles away from spray and pray methodology and underscores the criticality of manager selection in the venture asset class.  

At Laconia, we live on the outskirts of the land of unicorns (though we are certainly happy to identify one!) where there may not be headlines, but there is exciting opportunity for those willing and able to do the hard work. The moral of the story is there is a land not terribly far away, just on the other side of the forest, inhabited by innovative sub-unicorns that are generating venture returns beyond the headlines. Choose an able guide to help you find the way – you will be glad to have taken the road less traveled.  

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[1] Data provided by Pitchbook and the National Venture Capital Associations’ “Venture Monitor”. Data as of 12/31/2018.

[2] Data parameters: 951 venture capital funds, Based in the US and Canada, FY2002 – 2014. Study conducted by the Canadian Trade Accelerator (2019) ctaconnects.com/emerging.

Highlights: Venture Education Symposium In Retrospect

In 2018, we began hosting educational breakfast roundtables for family offices focused on the benefits and challenges of tackling the venture asset class with discipline and strategy. This event series revealed a strong demand for more in-depth educational content, leading us to embark on a full-day symposium to decode the asset class and make it more accessible.

Often when ambition meets reality, the results can be disastrous. So, on the morning of our inaugural Venture Education Symposium, the stakes were high. With name cards of 24 family offices carefully arranged, materials prepped, coffee & tea piping hot, and pastries on deck, we prepared to see which would win out – ambition or reality. By day’s end, after much engaged discussion and discovery, ambition indeed carried the day.   

Venture Within Asset Allocation | Professor Ian D’Souza

Ian D’Souza, Adjunct Professor of Finance, NYU, kicked things off and laid a strong foundation for the day’s agenda, noting that venture is a “difficult asset class requiring skill, patience, and a bit of luck”. Skill and patience were the resounding themes of the morning session, which offered a deep-dive into due-diligence on venture funds and direct investments. Given the nature of private investments, and varying degrees of available information, doing the “homework” and leveraging experience and expertise were highlighted as critical to driving better investment decisions and outcomes in the venture asset class.

Strategy, structure, expertise, and deep due-diligence are key to this unique and challenging asset class

Entrepreneurs Roundtable

The afternoon session transitioned into a working lunch and an engaging panel, featuring a candid exchange with VC-backed entrepreneurs. Symposium attendees got a glimpse into the mind of an entrepreneur, their unique path, and what they deem important in building a business and fundraising. What was extraordinary – beyond the remarkable authenticity and candor on display – was the diversity of paths these entrepreneurs followed on their journeys and the common theme of the importance of people and teams coalescing around a shared vision.

Successful entrepreneurs recognize the value of teams coalescing around a shared vision

Tax Considerations When Venture Investing | CohnReznick

After lunch, the discussion shifted to the legal and tax complexities of the asset class - ranging from standard vs non-standard LP term negotiation to Section 1202 tax exclusion, which provides significant tax relief for entrepreneurs and angels. A NextGen panel offered insight into how next-gen family members are integrated into the existing family office, shedding light on emerging trends, learnings, and the connection between financial returns and measurable social impact.

Legal structure and appropriate tax planning to manage complexities inherent in venture require resident expertise or an adept service partner

Shark Tank: Three Minute Quickfire Pitches | Led by Quake Capital

With cocktails and canapes in sight, we capped off the day with a fun “Shark Tank” session. Founders delivered 3 minute mini-pitches, allowing the audience to put their newly acquired knowledge to the test and serve as judges.  

Venture is the front end of the innovation curve that provides insight into public markets and touches every part of our lives.  Investors endowed with the luxury of time have the latitude to include venture in their asset mix, and it should not be entered into lightly, but with eyes wide open. Strategy, structure, expertise, and deep due-diligence are key in decoding this unique asset class and collectively can position the investor to separate the wheat from the chaff.

Special thanks to our sponsors, @LowensteinLLP, @FirstRepublic, @CushWake, @i(x)invests, and @Clade_Co for their support in making this event possible.