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The Seven Forces Disrupting Venture Capital

The Seven Forces Disrupting Venture Capital



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Published by: Crowdsourcing.org on Apr 28, 2012
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The Seven Forces Disrupting Venture Capital
posted 1 hour ago
 currently worksat  
 and is based in Palo Alto. Youcan follow him on Twitter  
 For the past few years, I have read overwhat seems like hundreds of blogs andthousands of tweets that either directlyclaim or indirectly hint at a disruption of traditional venture capital. For some, thefactors relate to the economy, that limited partners and institutional investors werereviewing their investment approaches. For others, it seemed as if there was toomuch money in the asset class, that there was too much money chasing too fewreal opportunities. There seemed to be a long laundry list of why venture capitalwas undergoing this shift, but never any thread that could lay out all the factors andsynthesize just how each factor contributed to shift,
until now…
1. Since “venture capital” is applied to many different industries with
vastly different economic structures, this post will focus on software startups. 2. I 
am not going to list examples below because there are too many and I don’t want 
to exclude any particular companies.
First, we have Amazon:
It’s cheap to build, host, test, and optimize software.
Amazon Web Services, for instance, 
 operational costs for young
companies, directly impacting a startups’ burn rate. Whereas in the past a notinsignificant part of an investment may be allocated to hosting, Amazon’s
innovation has helped entrepreneurs better manage costs and dampened the needfor venture capital investors to help out early with operational expenses.
Secondly, Angel Investors:
Once a products gets to some proof of concept, anentrepreneur can raise seed funding from an incredibly wide range of sources.Those that are either connected or lucky can solicit checks from family, friends,former bosses and colleagues, or they join incubators (more on this below), orreach out to relatively obscure or more well-known angel investors, all the way upto small institutional funds, what
some people refer to as “Super Angels” or “MicroVCs,” or websites dedicated to pairing investors with investment
opportunities (more on this below). The flood of early-stage capital has triggeredsome venture capital firms to also invest in the seed stage, where they have tocompete directly with smaller funds or vehicles, though a small handful of firmshave resisted and focused on Series A-style investments.
Third, we have AngelList:
Simply one of the most disruptive forces to theventure industry, the folks behind 
 have created extremely useful social
software that pairs investors with investment opportunities. For angel investors,AngelList provides an asynchronous way to scout, monitor, track, andcommunicate with potential investment; for startups, the system provides anopportunity for them to network, build reputation and good signals, and connectsthem to a wider range of potential funders. The disruption AngelList provides toventure capital is that the system could theoretically be used for larger Series Aand B fundings, and in some cases, probably has. It remains to be seen if it canscale across to this level, but given how much it has accomplished in a few years,
it’s not out of the question.
Fourth, we have Kickstarter and crowdfunding:
For some particular startups
that aren’t able to secure seed funds, either from angels, super angels, angel
-focused software, or venture capitalists that make seed investments, they canleverage crowdfunding platforms like 
 to tap into an even wider poolof available funds. And now with the JOBS Act, which will 
 forcrowdfunding of certain startups in certain situations, new companies can nowraise small amounts of money from many different people, just as a politicalcandidate may use small online donations from a large base to raise funds.
Fifth, there’s Y Combinator:
While there seems to be an incubator popping upweekly nowadays, the system, network, and brand built by the partners at 
below). Having this cash on hand affords these companies a bit more time andrunway should they need it, and gives them some negotiating leverage whentalking to larger investors who are keen to invest, sometimes resulting in highervaluations that venture capitalists have to compete against.
Sixth, is “New” Venture Capital:
The money given to these YC companies isn’t
 just normal money
it’s in part from a new style of venture capital pi
oneered byfirms like Andreessen Horowitz (
) and 
.While DST has made big betsand partnered with YC, A16Z has also raised large funds with a relatively smallpartnership, choosing instead to challenge the traditional venture capital personnelstructure by operationalizing services across functional areas such as businessdevelopment, recruiting, public relations, and sales. For a founder, the servicesoffered in this model are strong, and this has motivated some other venture capitalfirms to change their own structures in an effort to provide more services to theircompanies. Additionally, the A16Z investment thesis, which seems to be designedaround a belief that this is a particularly unique period of opportunity fortransformation both on the web and in mobile and that a small share of winners inthese categories will produce outsized returns. As a result, they seem to be willingto pay higher prices, which either forces traditional venture to compete or wait forthe next thing.
And, finally, seventh are secondary markets:
Now that early-stage shareholders(investors, founders, employees) of certain companies can sell their shares on thesesecondary markets, such as 
,they are able to accessliquidity much earlier in the past. On the flip side, larger venture capital funds thatmay have 
 on the next big thing because the new company wasincubated, or crowdfunded, or funded via a social network or small or large angelinvestors may have a chance to own a piece of the entity through these markets. Insome cases, venture capital firms have been quite opportunistic to buy and sellshares of larger web companies in a short period of time, making a quick flip and

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