Private Equity 20 Lectures（20）Future Trends and Prospects of Private Equity - Thirty Years of Excitement

Private Equity 20 Lectures, Legal Essentials for Silicon Valley Investors, I'm U.S. Attorney Xiaoxiao Liu.

In the last installment, we introduced private equity from its inception to its explosion in the 1980s. How has private equity evolved in the last 30 years? Has today's private equity fund evolved to its ultimate form? What is the future of private equity? Today we will take a look at the private equity fund of the turbulent thirty years, as well as the future outlook.

Regular Pattern Summary

1. 1990s - 2000s: the Internet Era

In 1957, Shockley Laboratories, Fairchild Semiconductor, and Draper, Gaither & Anderson (Draper, Gaither & Anderson) Limited Partnership coincidentally gathered in Silicon Valley, and the center of gravity of entrepreneurship in the United States shifted from the East Coast to the West Coast. The Internet giants that are household names today, such as Google, Facebook, Amazon, PayPal, and Netflix, were also born during this era.

2. 2000s - 2010s: The Rise of Incubators

When times move very fast, there will be fake and substandard imitations mixed in. the bursting of the dot-com bubble in 2000 made the VC community realize the importance of standardization, and incubators/accelerators were born. y Combinator, Techstar, 500 Startup were all born in this era. A lot of big companies nowadays also grew up under the support of incubators, such as Airbnb, Dropbox, and so on.

3. 2010s - Present: Fire and Ice

3.1 Micro funds

The last decade has seen the emergence of a new class of venture capital funds, the micro-VCs. Micro-VC funds are typically between $25 million and $100 million in fund size. They only invest in the very early stages of startups such as angel/seed rounds.

Micro-VCs are not just a game for people with a little money to spare. in mid-2021, three of Silicon Valley's largest and best-known venture capital firms, Andresen Horowitz (a16z), Greylock Partners, and Khosla Ventures, announced new large, dedicated seed funds. The push is on.

As a result of this push, seed rounds have also skyrocketed in the last decade or so.

As we can see from this chart, which is based on a five-year period, the three data sets on the right - Series A, Series B, and Series C - have not changed significantly between the three five-year periods, with the exception of the seed rounds, which have clearly quintupled and decoupled.

3.2 The proliferation of micro startups

The Mediterranean climate of Silicon Valley made garage startups possible, and the advent of the personal computer in the 1990s made these one-person, one-desk, one-computer startups even more common, while the birth of Amazon Cloud Services (AWS) in 2000 dramatically lowered the cost of building infrastructure for startups. All this has given rise to the emergence of countless micro startups.

3.3 Unicorns

With venture capital rising day by day, startups valued at more than $1 billion began to emerge in the industry, and venture capitalist Aileen Lee began using the term Unicorn in 2013 to define companies valued at more than $1 billion.

As of March 2022, the number of Unicorns has surpassed 1,000 globally, with nearly 600 in the U.S. alone.

3.4 The emergence of private equity platforms

In the last decade, you must have gradually heard people around you talking more and more about the concept of Private Equity Platform (PEP). That's right, if incubators/accelerators are for startups to connect with resources, then private equity platforms are to help investors screen and integrate resources. Private Equity Platforms allow for better screening of these uncountable micro-funds, and uncountable micro-startups, as well as diversification, diversification, and rationalization of investment allocations.

The list below is the top 10 private equity platforms in the U.S.

The Reason to Think

Then we have to think, why on the one hand is the micro funds and micro startups in full swing, on the other hand, unicorns such as high valuation of the enterprise and the prevalence of? What is the rationality of the existence of this situation of ice and fire?

1. Inflation

Nearly 20 years of continuous inflation following the 2008 financial crisis has made the average person richer.

Nearly 10 years ago, everyone should have heard the segment about Bay Area households earning $300,000 or more before they were just above the poverty line. And the investment threshold for private equity funds? That is, the "qualified investor" standard:

1) Asset element: $1 million or more in investable assets (excluding owner-occupied homes).

2) Income element: $200,000 per year for the past two years if filing as an individual; $300,000 per year for the past two years if filing as a married couple. In both cases, income is expected to remain at the same level this year.

With over $300,000 in the Bay Area, it is clear how many families in Silicon Valley have met the criteria for "qualified investors".

And in the last couple of years, with the inflation during the epidemic, this number has even increased to 500,000, which is often referred to as "Half-Million", so this family is close to meeting the standard of two qualified investors.

That's why in recent years often hear around the friends said to come up with money to invest in private equity funds, rather than as before, as soon as the money to buy a house, as soon as the money to speculate on the stock market. At least the concept of investment is not the same, the realm of investment also went up.

Inflation also makes the valuation of the enterprise further pushed up, coupled with more and more people into the private equity fund, so that the whole market has become more money, the profit-seeking nature of capital also makes more money into the head of the project, which in turn gave birth to more and more unicorn enterprises.

2. Capture early decision-making of startups

The first phase of the fund is usually a 10-year period, and after several rounds of seeding and maturation, the players behind the private equity funds are gradually realizing that it is important to invest in startups before it is too late. It's like what Eileen Chang said, "You have to be famous before it's too late". What is this principle? The earlier the company is, the larger the scope of the "decision tree", what does that mean? What does it mean? The more important everything is, the earlier the decision is made, such as founder's equity, board of directors, and the 1st 10 employees. If you get in late, there's a good chance that by the time an investor comes in, the startup has already committed irreversible consequences on many decision-making things that can't be changed.

3. Lower channel costs have given rise to a large number of micro-entrepreneurial project

Whether we are talking about civilian investors or large funds, we are talking about the investor side, but what about the startup side? It should be said that the channel cost reduction has given birth to a large number of micro-entrepreneurial projects.

At the hardware level, the Mediterranean climate of Silicon Valley and the emergence of personal computers in the 1990s should be understood by many, but there may be many others who don't know what this startup has to do with Amazon Cloud Services (AWS), so I'm going to focus on Amazon Cloud here. When I first started as a lawyer, many companies could not accept angel/seed rounds of financing, why, because the amount of initial capital needed is too large, one or two million such early financing is similar to none, so when did this situation change? When did this situation change? It was the birth of Amazon Web Services (AWS) in 2000. Now we will feel that Amazon cloud services (AWS) is the standard for startups, but before this, how small startups are also to build their own servers, self-built databases, which are extremely high-cost infrastructure work, each startup has to do it all over again, so to solve this problem, for the development of startups as a whole industry is also a great work.

Another is the software level, we now feel that video conferencing, electronic signatures are commonplace, but think back to ten years ago, let you have a meeting with someone video, and then the contract will send an electronic signature, the money will be remitted to the past, you do not feel a little like a fraud? Think about when we were small, feel that private equity that are completely unattainable big capitalists play the game. And after these two or three decades we are both offline and online, but also more and more experts to share the investment knowledge of private equity, such as Liu's lawyers, "Private Equity Fund 20 Lectures", so that at least on the middle class of this group of people, you can begin to contact and even practice private equity.

The future outlook

Silicon Valley in the past thirty years, is the private equity fund of thirty years of turbulence. During these thirty years, private equity funds from branding to systematization, with the Internet bubble boom and bust, with the epidemic decline and rebound. Private equity has gone from coterie to mass, civilian, standardized, and platform. What about the next thirty years? Just now we also said that the field of private investment on the one hand, the emergence of unicorns such a behemoth, but at the same time the emergence of countless micro-entrepreneurial projects and micro-funds, whether it is the number, type, diversity have reached an unprecedented point, then such a savage growth naturally will not be the order of the order of the indulgence of the current U.S. Securities and Exchange Commission, although there have been a number of rules to regulate the private investment, but in the view of our lawyer really are a drop in the bucket, the next step, there will inevitably be more detailed, institutionalized rules to limit such disorder, the U.S. "Corporate Transparency Act (Corporate Transparency Act, "CTA")", which came into effect on January 1, 2024, is an example of this, have interested you can watch another installment of my video about this act.

Sometimes time passes very slowly, and sometimes it passes very quickly. Silicon Valley is one of those puddles of time on the surface of the earth, where the highest density of people with the highest IQs in the world converge, bar none. What you go through in two or three years here takes two or three decades to experience elsewhere, and two or three hundred years for people elsewhere to figure out. Figure out the future of private equity in Silicon Valley, and you've got the future of the world.

Private Equity 20 Lectures, Legal Essentials for Silicon Valley Investors, I'm Xiaoxiao Liu, a U.S. attorney. I hope this series is helpful, and we will be releasing more quality legal videos.