Wednesday, August 28, 2013

The Future of Venture Capital...is Venture Capital

Today, I saw a post on the future of venture capital--a very popular parlor game in the Valley--which focused on how the rapidly declining cost of starting a company had rendered the traditional VC model invalid:
http://bit.ly/18lSFMa
"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."
This post is a potent mix of truth and assumption.  It is incontrovertibly true that it costs less to start a company (but this has been true since the Web 2.0 era began during the last decade).  It is also true that there are more seed deals and seed investors than ever before (with Angel List playing a starring role in this growth).  But it does not therefore follow that venture capital as we know it won't be around in the future.

While it doesn't take much money to start a company, it takes a heck of a lot of money to scale one up.  Just take a gander at how much money a couple of SaaS success stories needed to raise:
http://bit.ly/12MJs0K

It's also the case that taking money from 1-2 major investors who will get deeply involved with the business is far better than taking money from a faceless crowd.  Roughly 99% of startups will run into problems along the way and need more money from existing investors.  If you don't have major investors with skin in the game, you're not going to get it.
http://bit.ly/149jtxW

True, VCs probably don't belong in the seed game.  But their particular blend of focus, deep involvement, and deeper pockets is still as essential as ever.

1 comment:

Brandon Pindulic said...

"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. " - However, while this may be true, it also means that Angel investors must be even better at filtering out good prospective investment opportunities from bad ones, as they will presumably see more "revolutionary" ideas and enthusiastic, talented teams on a regular basis.