1Mby1M Virtual Accelerator Investor Forum: With Mackey Craven of OpenView Venture Partners (Part 3)

Sramana Mitra: You’ve been investing for a while. Let’s look at your 2017 deal flow. Give us some flavor of what trends you are seeing. How many deals do you see in a year? How many do you invest in? What are the highlights of the trends in that deal flow? Let’s just focus on 2017 just because we’ve just finished that time and it gives us a snapshot of what’s contemporary.

Mackey Craven: As a firm, we speak with roughly 5,000 companies and invest in five. We make concentrated investments that we think have the opportunity to be large and enduring. 2017 was no different. However, given the number of businesses and entrepreneurs that we speak with, one of the more interesting trends that we saw last year is directly related to the previous question around geography.

If you go back three years, I’d be hard-pressed even to point to a handful of software companies founded outside of United States that had the opportunity to be category leaders. That is changing. We’re seeing more and more businesses that are not necessarily founded or headquartered in the United States.

The entrepreneurs not only have the ambition to be the global leaders but actually have the capability to do so. If we look at our past investments, we’ve actually invested in more companies headquartered outside of the United States than in.

Sramana Mitra: Let’s double-click down on some of your investments in the recent years and let’s take some examples. In terms of trend, is the geographical trend the only major trend that you want to discuss?

Mackey Craven: A large one that we’re seeing is in the business model approach. Folks have been using the words consumerization of the enterprise. These are product-led growth models. Whether it’s deep infrastructure or relatively lightweight applications software or whether it’s large horizontal or specific vertical markets, they are increasingly thinking and taking product-led approaches to go to market.

That’s something that, three to five years ago, was an extreme exception. Fewer than 1% of businesses that we looked at closely had that model. Now I’d say that a majority of the business that we’re investing in take that approach. The final trend has to do with the financing markets.

Over the last several years, there’s been a large amount of seed stage capital available whether from some of the traditional sources or angels becoming active in the seed ecosystem. Given the pull market for the last 10 years now, the success of tech within that has a whole new class of successful individuals who are looking at it as the primary mechanism to grow their wealth and to get back to the community acting as angel investors.

While companies outside of major technology areas would bootstrapp to relatively decent revenue scale, we’re seeing a larger percentage of companies raising even if it’s a modest amount of angel or seed capital.

Sramana Mitra: There are 500 to 600 micro-VCs operating right now. These are new funds that have sprouted in the last three years. The amount of money that is going into seed has become a multi-stage investment in its own right. It’s an interesting situation. Just like the numbers that you described, you look at 5,000 deals and invest in five, the larger investment environment reflects those trends.

The last concrete number I have is actually for 2013. There were 70,000 seed investments and then only about 1,500 at most Series A investments. That ratio has remained, more or less, constant. I think there are 50,000 to 70,000 seed investments and only about 1,200 to 1,500 VC investments. That Series A gap is huge.

Mackey Craven: I think it has grown since then. There’s a larger number of seed investments but the number of Series A investments haven’t changed materially. The gap has widened.

Sramana Mitra: I agree.

Mackey Craven: On a relative basis, at the seed stage, there’s never been more capital to put to work. The same thing is true in very late stage venture or growth equity. This is when we talk about Series B and C rounds. There are more of those rounds than there used to be but there’s substantially more capital than there are opportunities. It’s not just a Series A gap. Many companies are getting seed funding.

There’s a similar number of A’s and roughly similar number of relatively early to mid-stage ventures. In the later stage rounds, there’s also a huge amount of capital. What seems to be happening is there is a calling mechanism. Many more companies are being founded. It’s great. If someone’s got a great idea and believes the right route is raising seed money, they have the opportunity to do that.

Because more companies are being founded, those that could get Series A funding are, on average, higher quality than have been before. Then there’s a very similar process in successful companies ending up having an increasing amount of access to private capital, once they pass that gamut. There’s a Series A gap and there’s the IPO.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Mackey Craven of OpenView Venture Partners
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