The Paradox of the Future of Venture Capital
This is a topic I’ve been thinking about a lot over the last few months and having some really interesting conversations around. Most recently at The Atlantic’s Startup City event last week in Miami. What follows is a bit of a ‘thinking out loud’ post - any feedback is welcome.
It’s not even controversial to point out that venture capital is being disrupted. What’s interesting is that lots of industry experts have different impressions of how it’s being transformed.
In my opinion, the best explanation for what is happening is that venture is being unbundled and rebundled.1 Interestingly, this causes a lot of people to both over an understate the “death” of venture.
Historically a lot of different functions that a venture firm did made sense to be organized in one corporate structure.2 Today, we’re in the early stages of platforms and transparency creating efficiency and in some cases making it less obvious why all these functions need to live under one corporate structure.
More specifically, a combination of platforms (AngelList), legislation / regulatory changes (JOBS act), and structural changes to how we build startups (accelerators, cloud computing, open source software) have started disrupting the legacy VC model.
At the same time, firms are adding partners and teams around specific services and creating software platforms to support entrepreneurs in new ways.
The following are two slides from a deck I presented earlier this month at our Labs LP meeting which summarizes a larger set of these trends. The first slide sets up the changes to venture we observed before launching Birchmere Labs.
The second is some of the continued catalysts for change after launching Birchmere Labs.
So is venture dead? The answer is a bit of a paradox: Yes but long live venture capital!
Obviously, I am biased given that I’m focusing my career here, but I believe venture has a bright future even while being unbundled and rebundled. When I look at historical examples of other industries my optimism is reinforced. No example may be more poignant then the media industry.
I spent 2 years as the COO at ReadWrite through its acquisition by SAY Media immediately before joining Birchmere. During those two years the media industry shrunk dramatically and every week I saw a headline about the “death of journalism.”
Yet sites like ours, TechCrunch and GigaOM were able to build profitable media businesses. In the case of ReadWrite, we grew revenue significantly and remained profitable every month over those two years. Part of this was due to obvious facts like not having legacy print business. However, arguably more important was partnering with Federated Media for a portion of our ad sales and understanding our competitive advantages.
Certainly when an industry unbundles a number of new companies emerge - like ReadWrite, TechCrunch or GigaOM. In venture capital, that has definitely happened with great new firms emerging.
Historical Brands Remain Relevant
I however made a decision to join Birchmere, a fund with a great two decade history of creating multiple “unicorns” (FreeMarkets, Cvent) and consistently being ranked top decile by the analysts that benchmark the venture industry (ex: Preqin). Two years into this decision, I’m really glad I made it. My business partners Ned Renzi & Sean Sebastian have been amazing mentors to me.
To finish the analogy to media, it’s interesting to look at legacy media businesses that improved during the industry’s transformation. There are a few that jump to mind, but for me no example may be more dramatic then The Atlantic. It’s one of America’s oldest magazines founded in 1857 with a storied past .
Yet, it had lost money for over a decade before turning it’s first profit in 2010. This is year at SxSW, The President of the Atlantic Scott Havens gave a presentation titled Can Great Journalism Make for Great Business? Not surprisingly he argues that the answer is yes.
Yet his prescription is interesting. He went through a number of “core beliefs” that shaped his transformation of The Atlantic.
We’ve tried to do this transparently at Birchmere via the publishing of our manifesto and ensuring our interaction with entrepreneurs and investors is consistent with those principals.
What do think? Too optimistic on venture’s future? Again, I’d welcome any reaction in the comments below.
By the way, this is not unique to venture capital. Other interesting examples of industries going through this at the moment include education, telecommunications and the video game industries. ↩
2. These roles included:
- Fundraising capital from limited partners to invest
- Deal sourcing
- Deal selection
- Helping investments grow (strategic advice, helping with recruiting, etc …)
- Providing corporate governance for investments (serving on boards)
- Exit management ↩