Trends Watch: Democratizing Venture Capital

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Hem Suri, Founder & Managing Partner, Spark Growth Ventures.

What is your outlook for VC investing? 

Before we discuss the outlook, let’s refresh what the current state of affairs is. Over the course of the last ten years but especially during 2020-2021, there was a significant increase in both the number of VC firms and how much firms were able to raise. This was a direct outcome of the loose monetary and fiscal policies across the major economies. The barriers to entry for both becoming a VC and for startups to be funded came down significantly, and this led to a plethora of unsustainable business models being funded, an emphasis on growth at all costs and lack of both adequate up-front diligence and proper post-investment support to companies (function of firms trying to deploy whole funds within one year plus many VC tourists jumping in).

However, positive trends have also emerged, the top ones being democratization of the VC asset class and more focus on diversity and inclusion. These trends have (i) opened up access for the underserved middle class investors who would like to participate in VC investing, (ii) provided all founders with more optionality for capital sources and (iii) enabled lot of deserving emerging managers to be able to become general partners (GPs), which was not easy earlier. We expect these trends – more democratization and inclusion, more innovative capital formation models and use of more technology for VC investing – to continue becoming more mainstream.

With regards to the broader outlook, we will continue to see a reset where VC firms will continue to regain leverage in terms of deal terms and things will be done with a more traditional approach: more upfront diligence and post-investment work with portfolio companies and more emphasis on sustainability of business models. We expect more separation between VC tourists/purely capital allocators and strategic valued-added VCs.

The overall capital raised and deployed will stay on the lower side in the near-term before slowly picking up in H2 ’23 and the momentum will not get back to the normal pace (2019 level) until at least mid-2024. There is always a chance of a faster and stronger rebound if some of the overhang such as the Ukraine war and the inflationary headwinds dissipate faster, given that there is ~$300B+ in VC dry powder (though not all is available for first checks and not all limited partners (LPs) would meet capital calls).

In the longer term (2024+), VC investing will stay strong and will continue to deliver outsized returns for investors and also create huge societal value – innovation is foundational for step-change progress, and when we zoom out of snapshots and look across longer periods of times, VC is both essential and also attractive. Therefore, overall, it is important to (i) stay disciplined and focused on the basics (for both the VC firms and the startups), (ii) stay in the game, while staying nimble, and (iii) remember that cycles come and go and some of the best fund vintages relate to recessionary periods and some of the best startups very launched and scaled during huge macro headwinds.

What are the greatest opportunities you see and why?

We are expert generalists and, therefore, our lens is very broad. We see opportunities across a lot of sectors and applications. Looking at the largest profit pools and real-world needs, post-quantum cybersecurity, AI and big data applications in health care/drug discovery, climate change/clean tech, blockchain applications in finance, and robotics/software to help address changing demographics and labor shortages could be the biggest opportunities over the coming years.

What are the greatest challenges you face and why?

We started in August 2020 with a simple mission of democratizing access to VC for the underserved middle- and upper-middle-class accredited investors and simultaneously providing the full power of a community of aligned members to our founder partners. Since our launch, our approach has had strong resonance from all stakeholders, and we have now created a global community of 750+ and a 21-company portfolio of top startups. In a way, we are a startup ourselves and are in the growth stage now. The VC operations part – capital formation, deal sourcing, diligence, post-investment management and all the back-office related to compliance, tax, accounting and investor relations, etc. – is underappreciated. It is much like any other business and takes a lot of roll-up-the-sleeves-business-building. This is at least 10x more elevated in our model where we have hundreds of community members across all continents, launch funds every one-to-two months and work with companies from many continents. Our biggest challenge as well as opportunity is to ensure that our human capital, technology infrastructure and processes continue to scale efficiently and effectively as we continue to bring our mission to life in the coming years.    

What keeps you up at night?

At a broader level, I worry about the continued extreme polarization in the society, climate change and our impact on flora and fauna, fiscal indiscipline, ever-increasing national debt and innovation such as AI, CRISPR etc. being used nefariously. At a more micro level, which relates to Spark Growth Ventures, it is around my responsibility to our investors as well as our founders to fulfill our commitments to them to the best of our capabilities.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.