This is the best info-graphic I have seen on the historical evolution of venture capital, from the early days of Arthur Rock to the current trend of “platform” investors offering the “everything in a box” approach to entrepreneurial investment. The evolving venture capital models are overlayed onto a trend graph of the cost of startups contrasted with the number of startups. At first glance one might accept the now common refrain that traditional “venture capital is dead.” When I began my career in Silicon Valley, the typical entrepreneurial growth company needed $5 to $10 Million dollars to launch itself. Today, the argument is that a promising company can be started on $5000 or less, and competitors eager to serve this new market have mushroomed. But is this really the future?
Two recent PBS documentaries, one on the genesis of Silicon Valley in the early 1960’s, and the other about the emergence of venture capital in the same period, something unheard of prior to that time, underscore my point.
If we are to pursue the Big Ideas, can they be funded with $5000 and a “package” of services? I doubt it. Examples to the contrary are available right here in the Lower Mainland of British Columbia. Quantum computing startup D-Wave, and nuclear fusion startup General Fusion, are prima facie evidence that traditional venture capital big money and expertise cannot be supplanted by an Alberta oil baron looking for a cheap risk investment. Angel investors, even as birds of feather, do not possess the financial clout or expertise to make Big Ideas happen.
I also believe that the $5000 startup investment cost trend is not the future. It is directly related to the current infatuation with Web apps as the new frontier, rather than Big Ideas like quantum computing, clean tech, renewable energy or nuclear fusion,
PandoDaily has this week also published two stories on venture capital, launching a debate about the future of venture capital. It is worth following.
Personally, I endorse Sarah Lacy’s defense of “venture capital classic.”
A rare defense of venture capital classic
BY SARAH LACYREBLOGGED From Pandodaily
ON AUGUST 30, 2013
One of our most popular stories this week was about the future of venture capital. It traced the asset class’s history from its boutique roots to the age of mega-brands to the rage around international expansion and into the last few years of microVCs, super angels, and accelerators. The article argued that “platforms” were the future of venture capital. Indeed, we’ve written before about efforts that Andreessen Horowitz and First Round Capital are undertaking to be more service oriented — through armies of people or software, respectively.
I grant a lot of the points Erin made in that post — particularly relating to the necessary change the industry has gone through as a result of startups becoming dramatically more capital efficient. As evidence of big systemic changes, she cites a lot of people more experienced than I.
But as an entrepreneur, I couldn’t help but groan at the concept of venture firms becoming “platforms.” Respectfully, I need a venture capital “platform” like I need a hole in the head.
You know what works in venture capital? A group of incredibly smart, connected people who have the financial wherewithal and risk appetite to make multi-million dollar bets on unproven ideas and inexperienced founders. People who can make decisions quickly, and who spend their time trying to help entrepreneurs make the most of that cash.
That’s it. I don’t care what decade we are in or what wave of technology we are talking about. That’s it.
Watch “Something Ventured,” PBS’s excellent documentary about the earliest VCs. You’ll see pretty much the same qualities that make up the best investors today also made Arthur Rock the man who helped fund Fairchild Semiconductor and Apple. They are the same qualities that encouraged Don Valentine to take a risk on weirdo Atari back when the idea of playing video games at home was scoffed at by nearly everyone else. These qualities epitomize Tom Perkins’ bet-the-firm risks on Tandem and Genentech.
Yes, things have changed about venture capital since those halcyon days of silicon assembly lines and fruit orchards. Typical venture firms invest later and get far smaller stakes than they did 50 years ago. Deal flow is far less proprietary in an age of demo days, tech blogs, and AngelList. And we’ve learned that many people are just awful at the job of venture capital. We’re in the middle of a decade-plus long incredibly slow shake-out of zombie firms that have chronically underperformed the market. The dramatically low costs of starting a company have given new access to entrepreneurs of all skill sets, geographies, ages, and risk-appetites that the industry certainly didn’t see 50 years ago.
All of this is mostly good for entrepreneurs, and has forced VCs to prove that elusive “value add” they always talk about.
But VCs who perform well aren’t doing it, because they are jumping on the bandwagon of new marketing trends. They are doing it because they are good VCs the way Arthur Rock, Don Valentine, and Tom Perkins were good VCs. They take risk. They coach entrepreneurs. The respect an entrepreneur’s plan, even if it deviates from their own. And most of all — they have millions to invest in each company.
No matter how much we want to go on and on (and on) about how cheap it is to start a company these days, actually building a sustainable company has never been more expensive. Venture studies show the time and money it takes to get public are longer and higher than ever before.
It’s no wonder that the flood of accelerators and seed funds and angels on that chart we published earlier this week immediately predated the so-called Series A crunch. Did these firms revolutionize how many people could raise seed capital? Yep. But ultimately the vast majority of those efforts still need good old fashioned venture capital to keep going. And that’s still in short supply. Indeed, it’s indecreasing supply.
I’m not arguing that recruiting partners and marketing partners and new ways to leverage other members of a given portfolio aren’t good things. But at best, they are icing on the cake. If you are deciding between two great firms, perhaps it tips the scales. And in terms of returns, that’s not trivial. This is a home run business, and the difference between almost getting Facebook and getting Facebook is a multi-billion “almost.”
But entrepreneurs wouldn’t (or shouldn’t) go with a firm they get a bad vibe from simply because they have someone in house who can help you hire people. They should go with a firm, because they trust that partner to stand by them and give them the unvarnished truth and material support in good times and bad.
And, by the way, as is almost always the case when it comes to Silicon Valley, it bears noting thatnone of this is new. The late 1990s saw talk of keiretsus and marketing partners and accelerators and incubators. Likewise, a desire to go international has come and gone a few times in the venture business. Even crowd funding had roots in Draper Fisher Jurvetson’s ill fated “meVC” fund.
Sure a lot of these trends are being explored today in more sober and sustainable ways. But the ideas aren’t new, just as the idea of classic risk capital isn’t an anachronism.
At our July PandoMonthly, Bill Gurley said that every time a venture capitalist opens his mouth these days, he’s marketing himself and his firm and how they are different. How much more entrepreneur friendly they are than the next guy. Ignore the marketing — just pick a good partner.
[Disclosure: Mentioned in this story are First Round Capital and Andreessen Horowitz. Josh Kopelman of First Round and Marc Andreessen, Jeff Jordan, and Chris Dixon of Andreessen Horowitz are investors in PandoDaily.]
REBLOGGED From PandoDaily
BY ERIN GRIFFITH
ON AUGUST 28, 2013
The dramatic drop in the cost of creating a company over the last decade ($2 million in the late ’90s to maybe $5,000 today) has had an obvious effect on the venture capital world. Serious venture investment is not required in the earliest stages of a company’s life, so angel investors have been getting the best seed deals. That spawned “super angels” and their subsequent micro-VC funds, which in turn evolved into crowdfunding platforms like AngelList.
Meanwhile, old school venture firms with their ten-year investment vehicles and mostly mediocre returns are realizing that money is a commodity. It echoes statements made by Fred Wilson of Union Square Ventures, who predicts that venture capital as we know it won’t be around in ten years.
Good founders can get capital anywhere. So they’re choosing the firms that will help them the most. That’s why some VC firms, like Andreessen Horowitz, have adopted agency-like models, where they provide in-house PR, marketing and recruiting. Others, like First Round Capital, are building acommunity-driven platform that allows its portfolio companies to share knowledge and help each other.
VCs are even becoming publishers — First Round recently launched its “First Round Review.” Andreessen Horowitz hired Wired editor Michael Copeland to produce content for its site. Battery Ventures hired former Wall Street Journal reporter Rebecca Buckman for a similar role.
As Alex Bangash put it, “VCs are becoming platforms and platforms are becoming VCs.”
He would know — Bangash has acted as a fixer of sorts for institutional investors and venture firms over the last decade. He’s also built his own platform, a site called Trusted Insight. (Since Bangash made the chart, he’s obviously included his own platform on it, to the far right.)
The site might be the largest social network for limited partners, i.e., the pension funds, universities, family offices and institutions that invest in venture, private equity, real estate and hedge funds. Today he publicly unveiled it for the first time.
Trusted Insight has eight employees and has raised a small amount of funding from Data Collective, Founders Fund, RRE Ventures, Morado Ventures, Real Ventures, 500 Startups, Alexis Ohanian, Garry Tan, Eric Chen, Lauder Partners, Jon Moulton, and Marleen Groen.
The site has 58,000 registered users representing trillions of investment dollars, which is an impressive number when you consider how small the global pool of alternative asset limited partners is. Bangash estimates that a third of the world’s alternative asset investment managers are on the site.
Couple that with how insanely private they are. As a reporter, I know all too well how hard it is to track these people down. They make themselves difficult to find on purpose, mostly because they don’t need to promote themselves, and they don’t want to be harassed by fund managers begging for capital. “LPs want a new deal like they want a hole in their head,” Bangash says.
Limited partners are like the Field of Dreams of the investment world. I can remember the private equity conferences we threw at Buyouts magazine. As long as we got the big-name LPs to sign on, we knew the fund managers, service providers and various other industry hangers-on would be there. After all, the LPs are the ones holding the purse strings.
Through Bangash’s connections and word-of-mouth, a large population of them have signed up for his service. Around 60 percent of them return each month.
There they can network with contacts, get a serving of personalized news tailored to their interests and activity on the site, and see job postings and events that are relevant to them. There is also vouching, and users keep a much smaller circle of connections than on a typical social network.
Bangash is not planning to pimp them out to fund managers desperate for investment dollars, per se. ”It’s built for them, to make them comfortable,” he says. He’s monetizing with a LinkedIn model. Users such as GPs raising funds, or service providers like lawyers, can pay a subscription fee for access to premium features, which includes the ability to interact with LPs. It’s akin to the way recruiters (and others) can pay LinkedIn to get messaging access to anyone they want. Since rolling out the paid tools six weeks ago, Bangash says he’s been surprised that more LPs than anyone have signed up to pay.
Bangash’s goal is to have investment professionals in the alternative asset sector use his site to do their jobs every day. As VC evolves from venture capital to venture platform, he’ll be there waiting.
[Disclosure: Mentioned in this story are First Round Capital and Andreessen Horowitz. Josh Kopelman of First Round and Marc Andreessen, Jeff Jordan and Chris Dixon of Andreessen Horowitz are investors in PandoDaily.]
