Since major developments in the early-mid 20th century, the private equity sector has been largely defined by boom and bust cycles over the last 70 years.
As with any industry, venture capital has gone through various transformations since the beginning, which has brought it to where it is today, considered to be one of the primary methods of financing for forward thinking concepts and startups.
Yet, it’s important for businesses to both understand and be aware of these changes in order to know whether or not venture capital is the right solution.
For example, e-commerce is one of the most highly invested in industries today, followed by logistics and finance. So before you start pitching investors, take some time to understand the current trends shaping the future of venture capital, which will ultimately help you decide what type of funding works best for your businesses.
The rise of thematic investing
There have been rumors that thematic investing may be the future of venture capital. As VC funding is often associated with innovation and creative risk, thematic investing has appealed to venture capitalists due to its vast potential. This method of investing is essentially based on future trends, thus there is obviously some risk involved, but in almost all types of investments this is inevitable. Businesses that are geared towards emerging trends in major industries, such as e-commerce, are an ideal candidate for thematic investments.
Yet, even the most adventurous investors need to feel confident in their potential partners, thus businesses that are planning to present themselves as a viable option for thematic investments should prepare in the following ways:
- Be sure that you conduct in-depth market research to reveal whether or not your business model meets current trends, but that your model includes a long-term plan
- Utilizing consumer research analysis to reveal whether or not you have a viable target market and what your ideal user expects from you
- Use this information to start communication with your potential consumers, adjusting your business plan according to their needs
Again, thematic investing is more than just giving a business money based on a hunch.
While no one can predict the future, you will have to do your best if you want to attract funding based on your ideas. You will increase your chances of success if you craft your pitch based on the thematic model. Start off by taking this main point into consideration: identifying current industry trends, evaluating competitor models and establishing a consumer profile.
The time of the Unicorn has come and gone
Just a few short years ago, everyone was talking about “Unicorns”. Not the mythical horse with a single magical horn protruding from its forehead, but rather, unicorns in the business world are startups that are worth at least 1 Billion thanks to large-scale investment from VC funding. While these ten figure sums look impressive on paper, these startups tend to have a hard time keeping up appearances in the long run. Usually lacking a solid consumer base, or sustainable business plan, unicorns are prone to failure as they have more often than not put the cart before the horse.
The legend of the startup unicorn has resulted in both businesses and venture capitalists taking a step backwards, shifting standards, in many ways for the better. Here are some of the major changes in the funding world that have led venture capitalists to tread more carefully when seeking out new investments:
- Crowdfunding and collective methods of funding have changed the dynamic between early stage businesses and venture capitalists. This has resulted in big VC firms pulling out of investments and redirecting the way startups and entrepreneurs seek out funding
- Co-investment is more popular, resulting in early stages business gaining more opportunities to seek out multiple investors from LPs, mutual funds, etc
- After a wave of what some might call “over funding”, venture capitalists are now seeking out potential businesses with added values, such as startups specializing in social entrepreneurship and social justice
For businesses that aren’t solely focused on technology, these changes are certainly welcome, as they help to diversify the professional economy and provide more options for traditionally underfunded industries to compete with traditionally prosperous ones.
Whether you’ve already experienced working with venture capitalists under your belt, or you are a complete novice in the business world, it’s vital that you keep up to date with the ever-changing landscape that defines the funding world. This can be done by following the latest trends in the startup community, conducting regular in-house market research and even reaching out to VC funding expert. Whatever direction you choose to take, always keep an eye on shifting trends in VC funding, as it may make or break your business plan.
Michael Volkmann is an entrepreneur with a focus on business operations and finance. He has worked with many small businesses helping them with their M&A for over 6 years.
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