Are you a venture capital statistics watcher? If so, you may want to alter some of your basic understandings of just how important the VC biz is these days.

Jim Verdonik, a long-time Triangle technology-focused attorney from startups to IPOs and other exits, says the investment landscape for new and emerging companies is undergoing substantial changes.

In other words, in many cases, VC is “becoming irrelevant.”

Verdonik, who works at Ward and Smith, P.A., in Raleigh, talked with The Skinny after the latest round of venture capital statistics were released over the past two weeks. Three of four reports showed North Carolina deal making fell below $100 million for the first time in nine quarters, but Verdonik wasn’t panicked.

He sought to put the changing VC landscape in focus.

“I see three factors that are important to keep in mind when interpreting the numbers about levels of Venture Capital investments,” Verdonik explained.

(1) A small data pool
(2) Changes the mix of businesses entrepreneurs are creating
(3) Alternative sources of capital that compete with traditional Venture Capital

Here’s what he means by a small data pool:

“When you have a relatively small pool of data, you also often have very large differences in results depending on when you measure the data, different processes for finding the data and different criteria for defining the scope of the relevant data pool.

“Timing also affects the data pool. With a small number of businesses raising large amounts of capital, a few big investments in one year can mean that a decrease the following year is almost inevitable. That does not mean the second year was a bad year. More likely it means that the numbers for the first year was artificially high

So, I think the primary reason for the variations you point out is that Venture Capital is just a small data pool in a much larger capital-raising universe.”

As WTW reported, the four “data pools” (National Venture Capital Association, Dow Jones, CB Insights, PricewaterhouseCoopers) each have different criteria for reporting deals. The NVCA-PitchBook report was an outlier, as they say in polling, with 36 deals and $166 million in deals. The others were much smaller but close at just under $100 million but far fewer investments.

Emerging trends

Verdonik warned against taking too literal a view of the statistics (good trend, bad trend, etc.) because of “some trends that are lowering” VC investments.

First, changes in mix of businesses entrepreneurs are creating

“Venture Capital continues to be very important to any company that faces a long research and development project before it can generate revenue. These are the proverbial hockey stick companies,” he wrote.

“Biotech, pharma, some medical device and some enterprise software companies are good examples of hockey stick business models. Venture Capital remains the primary source of capital for companies with a hockey stick business model.”


Then came his “irrelevance” point.

“Venture Capital, however, is becoming increasingly irrelevant to many other types of businesses,” he explained.

“Some of businesses can bootstrap by keeping expenses low. The cost of developing software has dramatically decreased since the peak of the Venture capital industry.

“Entrepreneurs that can generate revenue relatively quickly have many more choices for funding. Most of these other choices are less expensive than Venture Capital is. Entrepreneurs can reduce dilution by pursuing these other capital sources.

“Many software companies now are focused on Apps instead of enterprise software solutions. These Apps companies require relatively small amounts before they can begin to generate revenue. Therefore, many Apps entrepreneurs ignore traditional Venture Capital.”

Alternative financing

A big reason for changes in the startup world is choice in funding sources.

“For these reasons, early-stage businesses that are ignoring traditional Venture Capital and are pursuing capital through friends and family, angel investors and Crowdfunding,” Verdonik says.

“Crowdfunding for example, is becoming increasingly important. While the average Crowdfunding round is less than $1 million, some companies have raise $10 Million using Crowdfunding. Many venture capital managers are abandoning the traditional blind pool approach and are becoming Lead Investors that are followed by a Crowd in their Syndicates.

“Later stage businesses are pursuing alternative lenders that lend at high interest rates with an equity kicker that results in less dilution than raising the same amount through Venture Capital and the entrepreneur does not lose voting control of the business. I did two sizable deals this summer that fit this debt/equity kicker description.

“I suspect the surveys don’t capture these types of investments.”

Bottom line

So what’s the bottom line on these changes and the world of VC?

“The bottom line is that for both entrepreneurs and investors, the traditional Venture Capital model of creating blind pools with hundreds of millions of dollars in them to invest in hockey stick business models are no longer as attractive as other options,” Verdonik said.

“Traditional Venture capital will not disappear, but it is becoming a smaller percentage of the total capital raising picture. The net result of this is that the RTP are can have a very healthy entrepreneurial community simultaneously with a decrease in the Venture Capital investments during a specific time period.”