Part III: The Future of Venture Capital: A New Path to Growth

By John Bhakdi

In Part II: Structured Seed Capital, we have seen how a Structured Seed Capital framework can capture clusters of best-in-class technology start-ups and return 33% p.a. at a zero risk of loss. For many VCs, this number looks much more like a threat than a promise: Why should Limited Partners choose to invest in traditional VC funds when Structured Seed Capital beats it by magnitudes both in return and risk?
121 Series A deals at an average gross performance of 38% p.a.
In discussions with partners at Top 10 VC firms, we have developed a different perspective on this issue. The i2X framework breeds pioneers instead of seeking nuggets – but this doesn’t mean that seeking nuggets has to get out of fashion. A deeper look into our historic performance reveals that out of 595 start-ups in a diligently designed portfolio, 121 received Series A VC investments. More importantly, they performed in aggregate at a staggering 38% p.a. gross return, dramatically higher than even the top quartile VC average. This means that historically, Structured Seed Capital not only creates a superior asset class in itself but opens a massive new source of high quality deal flow for conventional VC.

Which leads us to another question: what is the potential size of Structured Seed Capital – and with it, of concurrent VC growth? Is what we found just a small market inefficiency that allows a handful of LPs to deploy a few hundred million dollars – or could Structured Seed Capital impact startup innovation on a larger scale?
Accelerators experience explosive growth
To answer this question, we need to understand the growth dynamics that underlie the larger acceleration matrix. When Paul Graham, the father of modern start-up acceleration, started Y-Combinator at Harvard University in 2005, he believed that the right mix of capital, mentoring and networks could massively improve the success of seed start-ups. Starting with just eight founder teams, Paul quickly validated his hypothesis with a series of big hits, including Reddit, Dropbox and Heroku. Other thought leaders like Brad FeldDavid Cohe-n and Dave McClure started to create their own accelerators, and by 2009 the capacity of the acceleration matrix had grown to nearly 200 start-ups p.a. – an annualized growth rate of over 150%. There was still no robust model to simulate exact portfolio returns, but blockbusters such as Heroku, Airbnb and others provided sufficient evidence to fuel further growth. In 2013, the matrix has grown to over 400 accelerator programs in the US with an output of 1000+ start-ups. This massive expansion took place despite a highly adverse economic environment, a total lack of seed investment infrastructures, and doubtful VCs.
The Lean Startup Creates An Efficiency Revolution
At the core of this amazing expansion stands a revolution in the way entrepreneurs build start-ups: the Lean Startup methodology, best captured in Eric Ries’ bestselling book. It allows drastic improvements in the speed and efficiency of business innovation, and I consider it one of the most important process innovations of our time.

The acceleration matrix is not a secret anymore, and gets support from both corporate and government entities; in fact, creating startup accelerators has become a favorite topic for policy makers and bi-partisan initiatives at the highest level of government.

But the most important future accelerator growth might come from a different source: leading US universities. Since Naval Ravikant of kicked off the discussion about Startup Accelerators as the new graduate schools –more elite, more challenging, and much more socially and financially rewarding than any Ivy League school – the leading universities have started to pay a lot of attention.
US Universities Systematically Build Out Acceleration Infrastructure
Let’s apply some i2X analytics to understand what makes the accelerator model so appealing to leading universities. If Harvard would be able to develop a program on par with the current i2X accelerator portfolio, it would generate $40m in returns for every 100 start-ups that enter its program. Per student, that is 5x the amount Harvard generates in tuition. Combine these numbers with Clayton Christensen’s prediction that 50% of all US universities will be bankrupt within the next 15years, and it becomes clear why literally every forward-thinking university works intensively on a start-up acceleration program. In the last two years, Stanford has created StartX, UCLA StartupUCLA, USC the Viterbi Startup Garage, Harvard the ilabs Accelerator, MIT the Beehive Coop, NYU the Summer Launchpad – and this is just a first selection.

All these observations allow one conclusion: the start-up acceleration infrastructure in the US is on a massive and sustained growth trajectory. It enjoys strong support from the White House, US governors , elite universities, blue chip corporations and leading VC firms. And the public’s excitement and understanding of technology startups is reaching new heights, indicated by Hollywood blockbusters like “The Social Network”.
A Potential for Tens of Thousands of Technology Start-ups
This is why I am confident to make two predictions: the current accelerator growth trajectory will continue, with the potential to reach an output of tens of thousands of technology start-ups within a decade. And a massive inflow of top-level talent into the acceleration matrix will allow selected clusters to maintain a superior investment performance even at high volume growth.

Our projections show that within the next five years, Structured Seed Capital can expand into a multi-billion-dollar asset class at a performance of 30%+ p.a. and a near-zero risk of loss. This means thousands of new seed stage start-ups that generate thousands of new superior Series A deals. At the current Series A conversion rate of 20% and at the current volume of 880 Series A deals in 2012 for the total US VC industry, this implies that 5000 start-ups in Structured Seed Clusters would roughly double the US VC industry size and dramatically improve its performance.
Start-up Innovation Removes The Limitations For Economic Growth
But how is it possible that more capital leads to increasing returns instead of decreasing ones? Different from every other asset class, seed stage start-ups are not limited in their economic value-add.

They are not oil, or government bonds, or large, rigid corporations. Seed Stage Start-ups are the core of human innovation – and as such, if managed and financed the right way, their growth has no ceiling.

The human economy is not limited in the value it can create; instead, growth and prosperity are functions of economic innovation. The more innovation we generate, the more value and growth all of us will experience. Given this logic, it seems absurd that of the roughly $80,000b actively managed assets today, over $79,950b are being allocated into low-growth asset classes like government bonds, public equity and real estate. Only $50b go into VC, and less than $1b into seed stage capital. This means we invest only 0.06% of our available resources into economic growth.

The reason for this epic misallocation is simple: as long as we try to pick individual start-up nuggets, we fail to capture the largest share of entrepreneurial potential; are exposed to huge risk in VC; and generate unattractive returns.
Structured Seed Capital Could Make VC The World’s Leading Alternative Asset Class
In 2013, we have gained the power to bring innovation to life. We are surrounded by a ubiquitous, powerful technology infrastructure; thought leaders have refined the wisdom of lean startup innovation; and we now have a new financial framework that allows the precise and scalable financing of structured startup clusters.

Together, these components provide a seamless innovation infrastructure that brings the holy grail of asset management into our reach:

the ability to directly invest into a scalable economic growth engine, and capture its upside.

Structured Seed Capital is more than just a superior investment strategy. It opens a path to empower entrepreneurial talent on a massive scale; to turn VC into the largest, most attractive alternative asset class; and to build an infrastructure to unlock human innovation on a new level.

John Bhakdi is founder and CEO of i2X. He previously served as an executive in some of the largest Omnicom and WPP companies (S&F, JWT, BBDO, DDB) where he shaped corporate development, M&A and innovation activities as Strategy and Executive Director. During his career, John worked closely together with both entrepreneurs and C-level executives in companies such as MasterCard, Siemens, Sinopec, Ford Motor Group, Dow Jones, Microsoft, The Ritz Carlton, Mercedes Benz, Deutsche Bank and Credit Suisse. In 2008, he decided to become an entrepreneur himself and moved to Silicon Valley which later led to the founding of i2X. Email John at

i2X is a structured seed investment framework that allows institutional investors to capture large clusters of seed stage startups at a superior risk/return performance. The i2X framework has been developed with the input from partners at top 10 Venture Capital firms, The White House’s Startup America Partnership, some of the top 25 alternative asset management firms and a large network of technology entrepreneurs and accelerator teams.

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  1. Siim Karutoom
    May 29, 2013 at 6:41 am

    Very well written article!
    I agree with capital misallocation in general and would like to add VC as alternative to traditional investments. In my mind some small percent allocation from pension funds should go to VC. Better way to support future innovation and economic growth than bank offered loans. Off course the risk is much more higher but with proper risk management it seems reasonable investment.

  2. John Bhakdi
    June 3, 2013 at 1:28 pm

    Siim – actually, 18% of VC comes from public pension funds today. But that is far less than 1% of the total amount of capital public pensions allocate. As described in the article, it is important to mention that it is not the pension fund allocators that are to blame for that, but the lack of financing innovation in VC. An allocator cannot increase her share in an asset class if this asset class constantly underperforms. It is the task of emerging managers to come up with better ways to capture the upside of innovation – which, given the circumstances of our times, shouldn’t be hard at all. But it takes innovative thinking and an understanding of quantitative finance to do so (see part II of the article).

  3. Elaine Shea
    July 10, 2013 at 2:24 pm

    Your conclusions regarding significant and positive implications for investors and inventors and for the economy are convincing and I look forward to i2X realizing them.

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