The prevailing notion in venture capital today is that the funding model, which has been in place for the past 20 or 30 years, is being forced to evolve as a result of changes in startup recipe for success.
Classic venture – defined as traditional risk capital deployed by an entrepreneur who does the bulk of the work building the business and makes the bulk of the decisions taking the occasional VC suggestion or intro – is on it’s way out.
The new model is a platform, which provides services like PR, marketing, and recruiting. The thinking is that capital is a commodity and in order to 1) win competitive deals and 2) reduce business risk, the VC needs to do more to help ensure startup success.
What’s changed is that the cost to start a company has been driven down from the millions in the 90s to the double digit or even single digit thousands today. Meanwhile the number of funded seed deals has gone up proportionately.
Funding alternatives including super angels, accelerators and crowd-sourced projects have become viable to entrepreneurs seeking to get over a much lower barrier to entry.
The competitive advantage VCs enjoyed of being one of the few sources with enough capital to get a company off the ground along with proprietary deal flow is diminished if not totally negated.
The venture capital response is fairly predictable. In order to reestablish a competitive advantage, they offer scale and services to entrepreneurs that lesser funded, lesser-established entities aren’t able to. This is the ‘new’ model.
There are two valuable side effects of this strategy as well. First, the VCs can scale their time more efficiently. They can spend their hours with startups and winning deals instead of interviewing operations folks, solving back office issues or marketing. The second is the founders that VCs fund can be more narrowly focused. They can be either highly technical or have narrow industry expertise. This is because on the platform, the VC can simply build the company around that skill set. The founder does not need to be a jack-of-all-trades as in the past.
That is the argument.
Personally, I don’t believe this argument it in its entirety. A VC who can’t win deals against new funding sources based on experience, track record and force of personality probably won’t do much better with a platform. Sarah Lacy, of Pando Daily summarizes the sentiment well in saying, “You know what works in venture capital? A group of incredibly smart, connected people who have the financial wherewithal and risk appetite to make multi-million dollar bets on unproven ideas and inexperienced founders. People who can make decisions quickly, and who spend their time trying to help entrepreneurs make the most of that cash.”
Yeah. I think this is the better way to look at it.
Now I’m not saying that a VC platform is not an innovation or has no value. What I’m saying is that 1) it’s a response to a change in environment and 2) a platform won’t make a mediocre VC or their returns any better.
The core of venture capital is the same. Strong entrepreneurs, with good ideas backed by helpful, knowledgeable investors have the best chance of success and superior returns.