I've been dialed into startups on the entrepreneur side for 15 years. It's pretty clear to me, the conventional ways of venture capitalism are no longer effective. Entrepreneurs have gotten smarter, are much more informed, and are seeking alternative ways to fund startup companies. In the age of TheFunded ("the Yelp of the VC world"), it's become imperative to think about the funding process as a customer service industry. Treat an entrepreneur poorly, get some bad juju added to your rating.
What's even more difficult to contend with, is that the rate of technology change is accelerating. The Stone Age lasted about 2 million years, the Bronze Age about 2000 years. Twitter is 3 years old. We are moving faster like some kind of technological Doppler effect. The duration of a "technology generation" is probably in the range of 6 months to 2 years. Now think about this; imagine taking 6 months to go through the funding process for a startup. You might be obsolete before you get started! Years ago, when a technology generation may have been 10 years, or even 5, consuming 6 months of overhead in the funding process wasn't the end of the World. It can easily be the death-knell now.
Although the venture world is thought of as the bastion of risk-taking, the truth is many of them are more conservative than you may think; they wait for markets to emerge first (and be proven out by others), then jump on them quickly -- the "fast follower" approach. Again, this strategy worked much better with longer technology generations. But it's quickly hitting the skids with today's rate-of-change. This fairly recent phenomena is pushing many VCs to move up into later-stage financing. Why? If you think about it, funding later-stage startups in proven markets is the same thing as going back in time -- back to startups attacking previous and longer duration technology generations. Rather than adapt their models to new circumstances, they're chasing history. Good luck. At the top of the heap, are other types of funds (hedge funds, private equity, etc) pushing down the financing stack. The early stages funding void left by VCs moving up, is being filled by super-angels and angel syndicates on the bottom. This whole picture is going to get ugly.
What VCs really need to do, is to get much more aggressive and quicker to fund seed-stage startups, network harder and broader, get more dialed into by-the-minute developments, and get on-board a fresh crop of new faces who are the pioneers of what's happening next -- they will often not have the long resumes, "brand names" that VCs so revere, and will probably sound crazy as hell. And by the way, nearly every startup funded will need to change shape drastically as it progresses. Welcome to the new order!
And then came the announcement from Andreessen Horowitz. It took the likes of a team which has angel invested in 45 tech startups in the last five years, to break the Da Vinci Code of startups (which has been hiding in plain site, in places such as Judy Estrin's book). These guys are spot on. Fund lots of initial stage startups, see which ones survive, and then go in with some real money. And just look at the sacrilege: focus on the importance of the tech founders being the CEO (what, you don't want to replace them right away?), don't bother taking boards seats (or even bothering to create a board) for initial stage startups, unafraid of new business models, and more. This is what adaptation looks like! That's how you get access to tomorrow's Google.
To add some texture to just how competitive the VC landscape is, here's a quote from Andreessen:
There are, he says, on average 15 tech companies launched a year that will ultimately do $100 million a year in revenues, and these companies are responsible for 97 percent of the returns in the venture industry overall.Imagine if a new VC firm swoops in and takes up 2 of those 15 each year. Make sure you're invested in a VC firm that's on the right side of Darwin. And as of the Da VC code, I think I know the next couple code ciphers to find the Holy Grail of 15...
Disclosure: no positions