This is the final part of a 3-part series on the major changes in the structure of the software & the venture capital industries.
The series started here if you want to read from the start.
Or the Cliff Note’s version:
Open Source & Cloud Computing (led by Amazon) drove down tech startup costs by 90%
The result was a massive increase in startups & a whole group of new funding sources: both angels & “micro VCs”
With more competition in early-stage many VCs are investing smaller amounts at earlier stages. Some are going later stage to not miss out on hot deals. I call this “stage drift.”
The opportunities for tech startups today are more immense than they’ve ever been with billions of people now connected to the Internet nearly all the time.
Downsizing Venture Capital
The venture capital business itself is going through an even more fundamental change than just the entry of a new category at the earliest stage. The industry is shrinking back to a mid-90’s level in terms of both dollars and numbers of firms.
The doubling of the industry size was caused by the euphoria of the dot-com bubble and since funds take 10 years or more to dissolve the bursting of the funding bubble has taken its time. We all know the result of the over-funding of the asset class – poor returns in aggregate for the industry. The best firms have still delivered results, though.
Yesterday I wrote Part 1 of the series on the changes to the software industry over the past decade that has led to changes in the venture capital industry itself.
If you don’t want to read that post, the summary is:
Open source computing drove computing costs down 90%, which spurred innovation in technology
Open cloud led by Amazon with their AWS services drove total operating costs down by 90%. This led to an explosion in startups.
Amazon in turn led to the formation of an earlier stage of venture capital now led by what I call “micro VCs” who typically invest $250-500k in companies rather than the $5-7 million that VCs used to invest.
These trends have put pressure on traditional VCs. Some have done earlier-stage deals and done well. Others have chased earlier-stage but lack the skills or relationships to do this effectively. Some have moved into later stage investments in an effort to “put logos on their websites.
The Venture Capital industry has changed over the past 5 years that I would argue are a direct result of changes in the software industry, not the other way around. Specifically, Amazon has changed our entire industry in profound ways often not attributed strongly enough to them.
I believe the changes to the industry will be lasting rather than temporal change. Venture capital is in the process of its own creative destruction with new market entrants and new models of innovation at the precise moment that our industry itself is contracting.
I will argue that when the dust settles, although we will have fewer firms, each type well end up more focused on traditional stage segments that cater to the core competencies of that firm. The trend of funding anything from the first $25k to funding $50 million at a billion+ valuation is unlikely to last as the skills and style to be effective at all stages are diverse enough to warrant focus.
I will argue that LPs who invest in VC funds will also need to adjust a bit as well.
When I built my first company starting in 1999 it cost $2.5 million in infrastructure just to get started and another $2.
This post originally ran on TechCrunch.
I recently spoke at the Founder Showcase at the request of Adeo Ressi. I asked what the audience most needed to hear.
He said, “They need an unbiased view of the fund raising environment because there is too much misinformation and everything seems to be changing fast.”
This was an audience of mostly first-time entrepreneurs. They have seen one side of a market where many of us have seen the ebb and flow multiple times. Still, market amnesia by ordinarily rational actors always surprises me.
I spoke about a lot of things during the keynote. If you are interested the Vimeo is here.
An edited version of this post originally ran on TechCrunch. This version has some additional details on a portfolio company I’ve invested in, which are disclosed below.
WWDC. The annual Apple event where no real hints about what products they plan to release are floated in the public domain in advance.
No private head nods are given to small startup companies to help them prepare. We’re in a market where 800-pound gorillas throw their weight around and the rest of the market races to react and survive.
Any company who develops products reliant on iOS spends weeks crapping their pants before WWDC. No vacation schedules allowed for weeks before or weeks after. The announcements come out in one day and then even if you survive the annual release announcements you often still have to scramble to make sure your product is ready to work on time.
This happens with Google, too.
Twitter is an ephemeral service. It’s what I love about Twitter. When I’m in the mood to consume what my world is telling me right now I can “tune in” to Twitter and digest the rapid stream. I don’t really worry about missing stuff. If somebody wanted me to see something they’d @ message me, which I always read. And as I’ve written about in the past, I truly believe that Twitter networks are significantly different from other social networks.
The downside to this rapid stream is that at times you come across super interesting articles that you want to read but for which you don’t currently have the time. How do you deal with this scenario? For me, when I use Twitter on my Blackberry I email the Tweet to my gmail account and I read them later. I auto filter these in Gmail so I essentially get a reading list of future articles. I think a lot of people do this if their mobile Twitter client supports it.
The way that I used to deal with it on Twitter.