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#014 As Stages Blur...Specialization Matters

Fri, 08 May 2020 12:22:50 GMT

Like every other industry, witnessing a massive shift and evolution, Venture Capital is no different!

One such trend has been Mega funds, who typically do series B-C rounds, going downstream - all the way to striking seed-stage deals! For example, Sequoia’s Surge and Scout programs are on a hunt for early-stage deals. As a large fund, a small round won’t move the needle in terms of the fund’s economics apart from enabling an early (surely more economical) stake in a potential unicorn, but it provides other unique advantages: (1) preferential access to deals to back with bigger cheques, weeding out any competition whatsoever or (2) the ability of shaping these companies quite early in their journeys to building for large value-creation in the future; these make the early deals worth it!

This strategy which seemingly floods the early-stage with capital, has slowly but surely started to blur the lines between investment stages, deal sizes and pre-money valuations. Seed-stage deals, especially in the Bay Area, today resemble Series A financings of yesterday, as deep-pocketed investors are more willing to dole out larger sums of cash at much higher valuations. Early-stage funds see this as a big challenge, yet that may not be necessarily true.

In fact, this ‘capital flood’ is pushing funds to work harder on their own value-propositions for investee companies – whether it’s building specializations in domains / sectors or creating a niche capabilities such as customer access, market access, etc. Founders choose these funds for such unique capabilities, rather than just for the money.

Therefore, Mega funds that want to play the early-stage game, need to be mindful of this need! Early stage deals require them to build the right support infrastructure, abilities to provide the right interventions, and establish the right specializations. This is certainly challenging for these larger funds, who may not find all this effort worth their while.

Referring back to Sequoia of course, they seem to have gotten it right on this one - having set up dedicated teams to support their early stage investment programs; thus ensuring the right engagement and interventions needed to succeed in early-stage investing.

At Cornerstone, we have identified ‘driving scale thinking’ as our core value-proposition for investee companies. Focused on investing in startups that are at the Pre-A and Series A stage, our startups have proven product market fit and commercial validation, we know exactly what we have to bring to the table beyond capital - new customers, new geographies, business model interventions, and creating an impact-scale mindset.

This to us is as critical as our fiduciary responsibility as Fund managers for our investors!

~ Nanika

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