“Hey if you’re interested we’re gonna do our first closing next week. Let us know — in the next day — if you’re in or you’re out.”
The private markets now move faster than ever.
Fund managers, solo GPs, and investors always knew the democratization of the private markets was coming.
But they didn’t know it would happen this fast. For the most part, Covid-19 is to blame. Instead of flying across the world to meet with investors, founders can walk to their kitchen and chat over Zoom — a new normal we’ve all adapted to since the pandemic started.
In a world where founders are moving faster, it can be difficult to win deals and get consistent returns for your LPs.
To compete, some fund managers and investors have had to rework their due diligence process just to get into deals.
Plus, there’s been a sharp rise in the amount of accredited investors competing for these deals.
These trends and democratization of the private markets presents a challenge for fund managers, solo GPs, and investors:
How can you move fast while making sound decisions?
In this article, we present a solution. One that gives fund managers, solo GPs, and investors more time for due diligence — not less. But first, it’s important to understand what’s causing the venture world to accelerate …
COVID decentralized the private markets. No more flights — just Zoom meetings.
“COVID-19 has made the investment world even flatter,” Rob Kniaz, a partner at London-based Hoxton Ventures, said via email.
What he means is this: it’s easier to raise money in every area of the private markets. GPs can raise faster from LPs.
Founders can raise faster from GPs. In practice, this means more deals are getting done faster. The amount of capital being deployed — never mind the surge of IPOs and SPACs — is simply dizzying.
If you take the estimated early-stage deal count in Q1 2021(1,170) and multiply it by 4 to represent the entire year (4,680), it represents a 50% increase from 5 years ago.
Here’s a visual comparison relative to the past 15 years, using Pitchbook Data:
More accredited investors, more liquidity, more competition
Even just a few years ago, there was plenty of room for late-stage and early-stage funds in the private markets.
Each had their own investment theses, processes, teams, and strategies. But it’s different now.
Early-stage startups are raising at higher valuations. They’re also exiting at much higher multiples. For late-stage funds, these early-stage startups have been “de-risked” — the risk is low enough relative to the upside that they’re now considered an attractive investment. At the same time, founders are moving faster.
Enabled by technology and fueled by an abundance of capital, they’re closing rounds faster than ever before. The time between meeting a founder and closing a round is getting shorter and shorter because there’s so much liquidity,” says Karim Gillani, founder of Luge Capital.
This liquidity isn’t random; investors and funds of all sizes are keeping their ear to the ground.
Later-stage funds are now less price sensitive, and more willing to move fast to secure their investments into these startups.
Karim says: “We would meet founders one week and the messaging would be, ‘Hey if you’re interested we’re gonna do our first closing next week. Let us know — in the next day — if you’re in or you’re out.”
Bigger rounds, earlier
Series A rounds are now Seed Rounds.
Seed Rounds are now Pre-Seed rounds.
Pre-seed rounds are now Friends and Family.
Friends and Family … well — you get it. Early-stage funds are growing.
Mark Suster of Upfront Ventures wrote about this last Fall.
He said: “A-Rounds used to be $3–7 million… These days $10 million is quaint for the best A-Rounds and many are raising $20 million at $60–80 million pre-money valuations (or greater).”
In 2021 for example:
- Andreezen Horowitz led or co-led at least 29 Series A rounds
- Tiger Global led or co-led 11 Series A deals
So in a venture landscape that’s packed with the world’ best investors, fund managers must work fast. Because guess what? Founders aren’t slowing down any time soon.
Winning investors work as fast as founders do
Founders work fast. They also work smart, which means spending time building their businesses — not fundraising.
This is another reason why the ability to raise and deploy capital fast is a must for fund managers.
Founders increasingly seek speed when raising funding, he said. “If I were a founder, I can certainly empathize with that situation because you’re motivated to find the right investors as quickly as possible so that you can build your business. You don’t want to spend your whole life fundraising.”
Moving slower than another GP could mean losing out of the deal.
Fast-closing rounds signal strong returns
Fast closing rounds outperform
The speed of VC has been steadily increasing since the early 2000s until 2019.
But in 2020 — in the wake of the Covid-19 pandemic — we took an exponential leap forward.
Josh Kopelman of First Round Capital says this: “we can look at every company we’ve ever funded, and learned that the time from first email/contact to term sheet has shrunk from 90 days in 2004 to just 9 today.”
A 10x time acceleration for venture deals may be troublesome for some fund managers.
Maintaining a structured, consistent due diligence process under these new time constraints may be difficult.
Frontline notes that regardless of their process, if they were to just invest in the deals that were moving the fastest, they would’ve outperformed their current portfolio:
“The companies that I said no to because I didn’t have time to complete due diligence (i.e. I was not fast enough) had performed substantially better than my portfolio. To put that in context, if I had never done a single piece of due diligence and only had invested in the companies whose rounds were closing fast, then my new hypothetical fast-moving portfolio would have raised more capital than my current one has.”
Later in the article, Frontline says that they’ve changed their due diligence process to match the new breakneck speed of the VC world.
But this is a slippery slope.
By this logic, VC firms would continue trimming their process until they threw due diligence out the window in favor of simply getting into deals.
Yet we know how important due diligence is to the investment process. And let’s not forget the fiduciary responsibility VC firms and fund managers have to their clients. There’s got to be a better way.
At Allocations, we think we’ve found the solution. One that reduces the time you spend on tedious administration tasks.
To illustrate this, let’s walk through a thought experiment …
How do you move fast AND do proper due diligence?
It’s clear that speed is a priority in the post-Covid private markets.
William McQuillan wrote about this on Medium:
“Speed, on the other hand, is much more interesting. When I first did this analysis over nine months ago, it was clear that there were some great companies I had missed because I was simply not fast enough. The solution might seem simple; just make faster decisions, but we are managing other people’s capital and making quick investment decisions without doing proper due diligence is reckless.”
This leaves a simple truth: the deals with the highest potential returns are the ones that allow the least amount of time for due diligence.
This also presents an interesting problem: how can you move fast enough to win a deal without sacrificing the proper amount of due diligence?
These charts above begin to answer the question: there’s an optimal amount that’s right for each investor.
But this seems hard to determine and the amount of deals you’d need to do to find the right amount seems too risky.
Earn back your time with Instant SPVs
At Allocations, we think we’ve found a solution by asking a simple question:
“What if we drastically reduced the time fund managers spend on administration?”
That’s what inspired us to build Instant SPVs.
When fund managers wanted to pool investor’s funds into an SPV, they’d have to manage the admin process themselves:
- Form an entity
- Start a bank account
- Track down account #s
- Manage investor’s documents
All while doing due diligence and trying to make sound investment decisions.
This just doesn’t work for modern emerging fund managers. Nor does it work in a private markets environment that’s moving faster and faster each year.
So Allocations built a platform to give fund managers more time to spend on deals by reducing the time they have to spend on administration.
We’ve automated the tedious tasks that used to take weeks:
- Investor onboarding. Onboard investors into a deal with a one-click experience.
- Deal pages. All the info your investors need on potential portfolio companies live in a streamlined, easy-to-scan interface. No more downloading PDFs or sending links through email.
- Legal docs. We’ve templatized all the legal docs you need to set up SPVs. Or you can drag and drop your own legal docs if you prefer. Either way, it’s simple and fast.
Plus, we’ve built Instant Banking into the platform too, which removes the need to keep track of:
- account numbers,
- wire IDs,
- and other important but easily loseable information.
Now, getting into that 48 hour deal means spending most of that time on due diligence and chatting with investors rather than building SPVs.