Welcome to the first article in our series exploring market trends, challenges, real-life case studies from the venture capital (VC) and private equity (PE) community.
In the first quarter of 2021, venture capital investment in UK scale-ups hit a record £5.1 billion – an increase of 25% on the previous high of £3.9 billion achieved in Q4 2020 – as investors sought to deploy vast reserves of dry powder in late-stage deals. And buoyant fundraising levels aren’t the only standout development in the dynamic world of VC: the traditional balance of power between VCs and founders is shifting.
Until recently, high-potential European entrepreneurs struggled in comparison to their North American or Asian counterparts to raise the appropriate funding they needed to grow their businesses. Now, market conditions are tipping the balance favouring founders, with business tax reliefs, record-low interest rates, the explosion of alternative financing options and more capital flowing into the scale-up fundraising ecosystem as investors look to the private markets for strong returns and exposure to tech innovation. For VC and PE funds, this redistribution of power presents several challenges.
“To get superior returns to LPs, investments require more strategic support as the fast-moving business environment becomes more competitive.” KPMG, Venture Pulse Report 2021
When it comes to choosing a VC, cash is no longer the only consideration for today’s high potential founders who are spoilt for choice – for three main reasons. First, they have the power to pick and choose the partner that represents the best fit to tangibly help their business grow. Second, they have unprecedented access to transparent information on potential partners, with review platforms like Landscape VC – where founders can leave anonymous feedback on VCs – exerting a growing influence on deal flow – for better or worse. And third, they have been quick to recognise the power of diverse workforces, opinions and cap tables to outperform their peers and are pushing to integrate diversity into every part of their growing businesses.
The best founders expect to work with funds that understand their needs – and with VC and PE funds that can actively help their portfolio to create genuine value. But meeting the varied expectations of founders is a serious strategic challenge for VCs with limited time and in-house resources at their disposal. Moreover, even for those VCs with an extensive black book of contacts, value-added capabilities like advisory, scalable commercial introductions, relevant expertise and resources, talent acquisition and PR are time-consuming to deliver and complex to manage.
This is where portfolio support platforms are changing the game. By engaging a scalable platform, VC and PE funds can extend their internal capability to deliver their own value-add to their portfolios and maximise their ability to achieve the investment returns.
When it comes to portfolio support, the figures paint a compelling picture. For example, just 10 years ago, the number of VC funds with a platform team was negligible. However, today, most funds market this capability to founders: in the past three years alone, the US VC Platform community has grown by around 120%, and the EU VC Platform has tripled in size.
For today’s VC and PE funds, portfolio support is no longer an optional extra or a “nice to have”: it’s a non-negotiable ingredient for successfully carving out a competitive advantage in today’s competitive market. With the scale-up market awash with capital, portfolio support will become a key competitive advantage when competing for deals, delivering value-add to increasingly demanding founders and generating above-market returns.
For VCs with the vision to respond to this challenge now, scalable portfolio support will also be an unmissable opportunity for funds to outperform the competition – not only by picking winners but by helping to nurture the winners of the future.
In our next article, we discuss the latest market trends in portfolio support and share our insights into funds of different sizes, small and big.
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