Eye-opening Concerns Of VC Funding At Absolutely Lowest

VC firms have been on the rise since the 1980s. However, like the Junk Bonds they replaced, a new way of funding could overtake them.

Over the years, I have helped multiple hedge funds, built an AI company for capital markets, and developed risk management models. So, this thought experiment comes from exposure to various LP-driven models.

Criticism

From an LP's perspective, VC is like a black box. Looking through a portfolio of startups is like reading bios of life insurance policyholders. Sure, a 35-year-old female who exercises regularly stands to live longer, but she could have a life-ending car accident at any moment.

Furthermore, more information needs to be available outside of the VC fund to monitor the health of these companies. For example, a hedge fund LP can see what the firm is invested in, monitor the prices of exchange-traded assets, and watch the news related to the portfolio. With VC, outside of a new funding round, the portfolio companies will show little change in value.

On-chain

The most promising alternatives today are on-chain assets. A few years back, there was a flood of Initial Coin Offerings (ICOs) to fund new crypto projects. However, that never took off like VC has over the past forty years. For something new to overtake VC, we must see legislative changes that make it viable for non-accredited investors to participate in rounds.

For example, bonds are difficult for a small company to issue due to legal and marketing costs. However, an on-chain alternative could remove those restrictions and make issuing bonds easy and cost-effective.

Peer-to-peer

Another challenger to VC funding for early-stage startups is crowdfunding. Crowdfunding began with the promise of a T-shirt but today allows non-accredited investors to participate in the company's gains and losses. Such peer-to-peer platforms fund companies outside of traditional investment categories, such as consumer products, small businesses, and moon shots.

Pink sheets

Several PE firms are offering to take companies public over the counter like the pink sheets of the past. However, such services are usually outside the budget of a new company. Instead, they are focused more on foreign companies with strong financials not yet in the Western Hemisphere.

Conclusion

Junk Bonds ended in 1989 with Michael Milken's arrest and the IPO success of several prominent VC-backed companies. Once a VC alternative proves itself to the mainstream, in contrast to a prominent VC fund going under, the tide could shift again, and a new form of early-stage investment would be born.