Wednesday, June 08, 2005

Next up - VC's offshored

Well, perhaps we are not quite at that point yet, but there have been several conversations lately about how the VC industry is changing, along with the general private equity market. Bill Burnham talks about how competitive advantages based on dealflow are extinct (except for the top handful of firms), while Fred Wilson agrees that thesis driven investing has helped Union Square Ventures go out and proactively find the right companies, rather than waiting for them to come to them.

Similarly, Paul Kedrosky talks about the end of geography as a factor in venture investing. This seems a natural outgrowth of a paper by Josh Lerner, which came to the conclusion (among many others) that endowments seem to do better when investing in VC's across the country, not just in the same state.

Finally, Mark Pincus takes it one step further, suggesting that a time may come when VC's and entrepreneurs may cease to be distinct identities. Instead, VC's would simply find a market opportunity they are interested in, and create a team to address it. This in fact, is exactly what a senior partner at Warburg Pincus mentioned as one of their approaches in a talk to my Venture Capital class a few months ago. In this same talk, he mentioned how Warburg Pincus was realizing that the PE market has significant economies of scale, explaining the several new mega-funds being raised recently.

These are all indicators of an industry maturing. Another indicator is the persistent and growing gap between the top funds and the rest. Much like consolidation in a manufacturing industry allows the top few firms to pull away from the pack, it seems that the top VC firms are increasing their lead on the also-rans.

As a VC aspirant without a great deal of financial background, but strong experience in technology, this gives me hope. Another investor I spoke to recently mentioned that the finance side of venture investing is now commoditized - it's really the value added services that will differentiate firms going forward. And since it's here that I think I have to most to offer, such a shift in the venture industry can only be a good thing.

Update: In an great example of how blogs allows for greater communication, I just saw that Daniel Primack mentions one of the points above virtually verbatim today. I don't want to make too big a deal about the coincidence, but it shows how much more access people outside the industry have now. In the past, there's no way that and outsider like myself could end up with even close to the same information as someone as well connected as him - but now, because of more conversations taking place, we can connect at least two of the same dots at the same time.