Rookie investors on a unicorn hunt guided by the stars

Snoop Dogg has invested in a start-up called Eaze, an "Uber for weed" that delivers marijuana to your door. Ashton Kutcher is putting money into Spring, a mobile commerce app that is a "Tinder for fashion". The Winklevoss twins, whose claim to have invented Facebook earned them a stake in the social network, are the creators of Gemini, a "Nasdaq for bitcoin". Anyone who is anyone, it seems, has a venture capital arm these days, and everyone hopes they find the next billion dollar sensation.

The number of so-called unicorns, start-ups that have achieved a $1bn valuation, is growing at a rate of about one a week, and the number of what you might call "unicorn hunters" has been growing even faster.

There has been an explosion in new venture capital firms, founded occasionally by celebrities but mainly by individuals with a decent record of personal angel investments, executives coming out of big tech companies, or entrepreneurs with a successful start-up or two behind them.

Mr Kutcher, who starred in Dude, Where's My Car? and has investments in Spotify, Airbnb and Uber to his name, proves that even unlikely people can make successful VCs, with hard work and good advice. The millennial children of wealthy families are also drawn to start-ups and the most successful have parlayed that into impressive VC funds, as has New York real estate scion Josh Kushner, whose Thrive Capital was an early backer of Instagram and Kickstarter.

The flotation of Etsy, the online crafts retailer, at a $1.8bn valuation on Thursday proves unicorns can be real, but you do not have to believe we have returned to the days of dotcom mania to believe that too many players are entering the market.

The number of new "micro VCs" in the US, funds with less than $50m to invest, which are often set up by first-time venture capitalists, rose from 32 in 2013 to 291 last year, according to venture capital research firm CB Insights.

For investors who want to put money into venture capital it means a dizzying amount of choice - and plenty of opportunity for missteps. As for whether it has pushed start-up valuations too high, time will tell.

The number of fund launches reflects surging demand from investors, most of whom - whether they are individuals, wealthy families or institutions - lack the tools to find the next Uber while it is in its infancy. They are looking to hire a unicorn hunter.

Investors need to rein in their excitement and keep a hawk eye on the quality of new entrants. Are they backing people who have really put in the time building a network of entrepreneurs and investors, and building an investment record? A few years at Google does not a VC make.

Nor does access to family wealth guarantee access to the hot deals. The success of Mr Dogg's Casa Verde Capital - "a pioneering venture firm" thatwill invest in "legally compliant and market leading companies in targeted industries" - will be tied to the efforts of its principal investors, not to therapper's fame. In short, there are no short-cuts.

Venture capital has a poor long-term record as an asset class, however. The rise of micro-VCs has certainly changed the landscape, but while the size of each individual bet may have come down, the overall maths may not have changed very much. It requires the same proportion of mega-hits and reliable mid-tier companies to emerge to outweigh a start-up failure rate of 75 per cent or higher. The more competition there is to get into hot deals, the lower the likelihood of an economic return.

What have been the effects of this explosion in micro VC finance? It has been a boon to entrepreneurs looking to expand their businesses quickly. It means real money is available to create real jobs, and the phenomenon has expanded beyond Silicon Valley to other US start-up hubs. It will undoubtedly catch on and bring benefits overseas.

The unhealthy side effects are showing, however. The new money coming into early-stage companies is not being evenly spread around. Buzzy start-ups are raising more money, more frequently, even opportunistically. The hottest funds all seem to be in the hottest deals.

These developments in early-stage financing may be as significant as the phenomenon of hedge fund, pension fund and mutual fund money chasing late-stage private companies, which is often remarked to have pushed private market valuations into bubble territory.

In the long run, successful unicorn hunters will be no more common that the unicorns themselves. Investors should not expect to see them too often.

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