Ishan — I like your comment that VCs “often look at investing as a series of experiments.”
The experiment-focused lens VCs use to evaluate businesses is a double-edged sword. On one hand, it ensures products and business models are de-risked through a series of milestones. (This is great for preserving capital in pursuit of moonshots.) On the other hand, it limits the universe of VC-backable endeavors to projects that can be efficiently tested. (This means that long-term, expensive-to-test moonshots aren’t ideal for VC.)
In the world of lean startup experimentation, “failing fast” is often seen as a positive because it ensures resources aren’t squandered on doomed projects. Failing fast also means that capital can be spread across a greater number of enterprises running ever-cheaper experiments. In essence, smart capital will always be most efficiently allocated to projects that are cheap to test. Specifically, cloud computing has drastically decreased the amount of capital required to start a company and test a product; it has enabled asset-light models that are well-aligned to VC search criteria.
If we look at the last 100 VC-backed exits with valuations over $1Bn (i.e., “unicorns”) over half of all unicorns are asset-light, a small subset of which are MCIs. In aggregate, asset-light unicorns have generated total valuations of over $270Bn at an average valuation per company of $3.8Bn.
VCs are spectacular at identifying and investing in MCIs when the MCIs are asset-light. The asset-light unicorn is the ultimate VC prize.
However, not all MCIs are asset-light. Some MCIs many take years of expensive experimentation before we know whether the product will succeed. Biotech is one example. This hasn’t stopped some intrepid VCs from backing these more asset-intensive businesses. However, on average the VC asset class may not be as well suited to make such long-term, arduous investments given that LPs expect returns within a few years.
For asset-light MCIs, venture capital is the perfect source of funding. Other types of MCIs may need more creative sources of capital. Curious to hear the perspective of someone with CVC insight on the topic of MCIs.