Traditional venture capital decision-making is about to undergo a make-over that will make the pace of change that brokerage houses saw in the Nineties look like a snail crawling across your lawn. That three-week window you used to have to make a decision? It's left the station. The new normal? Three days. And within eighteen months, this will be down to three hours. Then three minutes. Then three seconds. Then three milliseconds.
(c) 2019 Stanford University “The AI Index 2019 Annual Report"
Don't believe it? Bookmark this page and come back to this page five years from now. Gartner thinks that by 2025, 75% of VCs will be using AI to help with decision-making. The reason is pretty obvious: AI and automation are essential to efficient decision-making, and efficient decision-making is what you are going to need real soon now.
Increased competition is coming to VC. According to a number of industry observers (including some of the larger family office managers), hundreds of billions of dollars are getting ready to move into the cap tables traditionally occupied by VCs. Campden Research says family offices control around $5.9 trillion currently. Francois Botha of Forbes says the average allocation to venture has hit an average of 10% of family wealth. I'll let you do the math.
Many VCs that I've spoken with dismiss this prediction with a flick of the wrist. It won't happen, they say - "family offices lack deal flow, the tools, and the experience to compete."
The deal flow argument is rubbish. Most family offices I know invest in multiple venture funds - precisely because they want to expand their deal flow beyond the confines of any single feeder fund. And many have referral networks that would be the envy of many VCs.
The "tools" argument needs to be taken a bit more seriously. But while it's true that in the future, being able to generate and act on useful decisions quickly will be the most critical skillset in a venture firm, it would be a giant mistake to assume that this critical set of skills cannot be brought into a family office, syndicated via Angellist, or, within five years, replicated using AI.
[Hatcher+ is just one of several companies that are building AI-based data models and process automation systems designed to enable the kind of optionality afforded by the rapid construction of large-scale, early-stage portfolios. And if family offices decide to take this approach and begin collecting pro-rata rights en masse, it will be the VCs begging for a seat at the table at the Series A round, not the family offices! ]
As for the question regarding the level of decision-making "experience" available to family offices, one of my favorite memories is sitting in a diwaniya in Kuwait City, watching as the 25-year-old and 23-year-old sons of a patriarch listened attentively to their father talk in detail about a massive business deal he had just done.
My point is - when it comes to decision-making, there's some pretty excellent decision-making DNA available to family offices, and this DNA has in many cases previously created a massive amount of wealth, sometimes within a single generation.
Weeks, days, hours, minutes, milliseconds. If we apply Moore's Law starting at the comma after "days", we get six years. If we go instead with "weeks" as the current situation, we're looking instead at seven and a half years.
I personally think things are going to get a lot more competitive a lot sooner than seven years, based on the attractiveness of the returns and the rising availability of capital - so my prediction is the same as Gartner's: adoption of AI by 75% of venture firms worldwide by 2025, for competitive reasons due to speed, and, for all but the largest and most well-established VC brands, survival.
John is a serial entrepreneur and investor, and the Founding Partner of Hatcher+, a next-generation, data-driven venture firm that utilises a massive global database in combination with AI and machine learning-based technologies to identify early-stage opportunities in partnership with leading accelerators and investors worldwide.
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