VC is broken – a good headline but not very helpful. Last week the Kauffman Foundation issued a report titled ‘VC the enemy is us’ which re-sparked the debate on what is wrong with the tradition VC model. The report included some useful advice however it felt a little like moving deckchairs on the titanic.
Overall there are some fundamental issues which need to be addressed. Fred Wilson has written about the oversupply of capital. The industry needs to shrink in size however it is difficult for incumbents to vote for these types of changes. As importantly the industry needs to innovate. Dave McClure has written that we can do better. He is right.
There are many things in this world that are ‘broken’ but for which we lack a workable alternative. Consider for a moment, the Pharmaceutical industry where the costs to bring a new drug to market costs north of $1b, takes on almost 10 years and helps less than 40% of the target patients. However what is the alternative? There are many other examples (e.g. Euro crisis, etc) where the situation is suboptimal but we have yet to find a better way. Same for the VC industry – change is needed however it is still unclear what the new model will look like.
Last week I attended Venture Day at IE business school nMadrid. They had a very interesting line-up including Jeff Clavier, Ali Partovi, James Tan, Jerry Kennelly, and Gary Steward to name just the first page of speakers.
Madrid reminded me of Dublin2 years ago. Despite the sunshine outside there were very dark clouds hanging over the room. Unemployment is close to 25% and much higher among the young. Small businesses and start-ups are seen as an important part of economic development however finding credit (and customers) is very difficult. The local ecosystem of investors, entrepreneurs, educators and public servants are trying to create a new model to support start-ups but it is not yet clear what the model will look like. Including new developments like Startup Spain
A couple of things struck me. Firstly, accelerators, super angels, micro VC firms are likely to be part of the solution. For example Jeff Clavier talked about closing their latest round and doing over 100 investments including 20 exits. The ability to deploy very small amounts of capital over short periods of time as game stakes is interesting. There are a number of experiments happening in the areas of crowdfunding. AngelList is hinting at new ways to connect with smart capital. However there are a number of challenges in terms of scale when you think that it is time (or attention) not money that is that main restriction.
Secondly, a lot of discussions of the discussion over dinner focused on copy cats or business model arbitrage as it is called in China. What role do start-up factories like Rocket Internet have in the ecosystem? How do investors protect and leverage these opportunities?
Thirdly, disruptive change is rarely started by the incumbents. There are simply too many vested interests and so it begs the question of the role that the valley will have in creating VC 2.0?
Overall it is clear that the VC industry is still very immature and still evolving. I’m currently reading Boomerang – The Meltdown Tour by Michael Lewis. The book tells the story of the financial meltdown as it impacted Iceland,Ireland,Greece and US. It is an amazing read and the one thing that stand out is how long the old structures remain even when everyone knows the game is up. I think the same applies to the venture capital industry.
Tomorrow I will attend the Global Corporate Venturing Symposium in London and it will be interesting to see how thinking has developed in the last 12 months.
Corporate venture groups are playing an ever important role and learning from their previous mistakes. It is clear that something new is happening but it is not clear what it is exactly.
