Building and investing in startups is rapidly proliferating to the many, instead of remaining the preserve of the few.
The old paradigm of physical centralization
Silicon Valley is the innovation bellwether of our time Server Hosting. The concentration of talent and capital?—?as well as a culture typified by speed and boldness?—?has created trillions of dollars of shareholder value and pushed the envelope of innovation.
The venture capitalists on Sand Hill Road have for decades dined on the fruits of funding entrepreneurs who travelled to the valley’s rich pastures or the alums of local academic institutions. There has always been a symbiotic relationship between entrepreneurs and investors, with often diverging goals.
Investors have historically required face time, something founders have been willing to do as the balance of power has predominantly resided with the cheque writers. This has led to the concentration and subsequent clustering of talent and startups. Whether building processors, web or mobile products; proliferation has been global whilst the innovative companies and venture investors remained local. In other geographies policymakers have worked to replicate this model of innovation and concentration, in my view wrongly.
The evolving startup stack
In recent times venture capital has become near-homogeneous, or as Brad Feld argues often undifferentiated. In 2016, global venture investments totaled $134bn versus $40bn a decade earlier. In that same timeframe, accelerator programs have also exploded, from just two to over a thousand programs globally.
Breakthroughs in technology , changes to regulation and socio-economic tailwinds are allowing talent and capital to be more widely distributed and at the same time closely connected. We’re witnessing the democratisation of a number of components of the startup ecosystem.
This decentralisation is increasingly shifting startup creation to a broader populace. Today, we’ve seen a number of large company outcomes away from the mainstays of silicon valley, New York and London?—?Snap, Zayo, Mobileye, HomeAway, Retailmenot, Simplivity, LivingSocial, Waze, Supercell and ARM have all been created in comparative isolation.
Let’s further explore the two main categories of this shift, capital and the startup stack:
Distribution of capital
Startup funding has broadly has taken the form of either cash for rewards, cash for equity and more recently tokens.
Reward based – Indiegogo and Kickstarter were at the forefront of the initial wave of crowdfunding, where cash would be exchanged for future products?—?with the financing allowing such products to be made. One of the most prominent changes has been in equity based crowdfunding. Last year’s introduction of the JOBS Act Title III, has further accelerated equity based financing?—?giving unaccredited investors the ability to invest in early stage startups.
Equity based – AngelList has been a key proponent of this, allowing accredited investors to invest in angel syndicates run by, often, experienced investors or operators. In 2016, Angel List facilitated $190m of investment in over 460 startups and saw a number of their companies raise at over $1 billion. On a run-rate basis, that’s roughly the equivalent of a $570m angel fund.
Tokens – Beyond this, we’re seeing a further, and more pronounced decentralisation of capital. The advent of the blockchain, firstly through Bitcoin and more markedly through Ethereum has given rise to new forms of currencies and startup funding. The blockchain provides open, decentralised networks on top of verifiable ledgers of record. It has also allowed us to philosophically ask ourselves what we perceive value or currency to be .
More recently, we’ve seen the acceleration of initial coin offerings (ICOs) amongst startups and organisations. ICOs allow individuals to purchase organisation or startup specific tokens (cryptocurrency) within a specified timeframe. They do not provide the token holder with equity in the traditional sense but allows them to own a company linked public, tradeable security. In the first half of 2017, ICOs have outstripped traditional blockchain venture capital funding, raising $327m of funding.