Follow me @samirkaji for my random, sometimes relevant thoughts on the world of early stage venture and start-ups. With the number of seed funds rising daily, I often get asked the following two questions: 1) Is there too much institutional seed capital? 2) Are there too many seed funds? While often conflated, these are two very different questions. Is there too much seed capital in venture? No, I don’t think there is too much institutional seed capital. I’d posit that the ~$4B raised annually by seed VC’s (along with the nominal seed allocations for traditional venture funds) is relatively light when compared to the opportunity within the innovation sector. Not unlike the industrial revolution of the late 17th century, I believe we are just entering into a similar revolution borne out of the technology sector. While technology booms in the past were typically a function of specific innovations (internet, mobile, mainframe computing), we currently live in a world of technological ubiquity that is enabled by robust infrastructure and distribution networks and more importantly, pervasive consumer/commercial acceptance and adoption of technology. Look no further than the public markets where the top five US public companies by market value are technology companies, valued collectively at $3T. Traditional non-technology companies have also tangibly acknowledged that adoption of technology is no longer an option, but a necessary component of survival and scale. This has spurred a massive increase of corporate venture capital in recent years along with substantial growth of acquisition of technology companies by non-traditional acquirers such as Wal-Mart, Unilever, and General Motors. Are there too many seed funds? While the answer is much more nuanced than just the visceral “feel” of too many funds, the answer is probably still a yes. Before I delve into the why, let’s acknowledge the benefits of having 500+ seed funds, including mass optionality for founders and the positive impact the seed fund universe has had in driving diversity at the investing level. That said, a venture fund’s viability is a function of its ability to drive consistent returns for its limited partners, and the growth in the number of seed funds has required managers to navigate much more complex waters to generate alpha returns. Despite the advantaged mathematics of returning a small fund, the reality is managers already faced long odds of returning alpha (3–5X) before the saturation of the seed fund market. The charts below illustrate the home run driven nature of venture capital, regardless of fund size (courtesy of Horsley Bridge). While some may opine that massive home runs are necessary just for larger funds, the math suggests otherwise. I acknowledge that the he necessity of outlier outcomes for alpha venture fund performance isn’t by any means a profound insight....
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