If The VC Model Ain't Broke, Don't Fix It

from the just-shifting-expectations dept

There's been a big discussion among many, many parties concerning how the VC industry is broken and needs to be reformed. It's a compelling thought -- especially for those of us who don't mind pointing out some of the more ridiculous actions of VCs over the years. However, some are asking if the "model" is really broken while others are asking what value VCs add these days. It's definitely an interesting discussion, but as often happens, in these discussions, it seems to have gone a little askew at points. First off, some of the participants seem to assume that venture capital is something for all businesses -- which is a common myth (sometimes spread by those in the business). Venture capital is only for a very specific type of business: high growth businesses that have high capital costs. There are actually very few businesses that qualify. Most businesses aren't high growth at all, and plenty don't need the kind of capital that VCs offer. The big "change" these days that's causing all of the discussion is simply that technology, both hardware and software, has gotten cheaper -- meaning that fewer businesses in the tech world necessarily need the same kind of capital to get going. As for the idea that somehow a new form of VC is needed that involves "public" investors -- that has already been shown not to work. It was called MeVC and it collapsed almost the instant the last bubble burst -- leading to a shareholder lawsuit. A second issue, though, is that much of this discussion seems to assume that "VCs" are some sort of monolithic entity, and that they're all the same. That, obviously, isn't true at all. There are some terrible VCs and some great ones. And while we've pointed out that many VCs act in a way that shows that even they don't believe that their connections are worth anything, there can be some value in working with some VCs -- including the prestige factor (getting the stamp of approval from a top firm can be quite helpful).

The easiest way to look at all this, though, is simply as a variety of market adjustments. When the last bubble burst, raising money became "expensive." VCs simply weren't investing (which was silly, because deals were cheap). However, entrepreneurs recognized that other things were cheap. Labor was cheap (so many out of work people). Technology was cheap (thanks to Moore's law and open source). So, they built products using that as a basis. However, now labor is starting to get much more expensive (thanks to Google and Yahoo), even as technology has remained cheap. Capital, on the other hand, is getting really cheap. VCs have large funds that they need to invest. So, smart entrepreneurs won't complain that the VC world needs to change -- they'll just look for ways to take advantage of the shift in markets. When capital is cheap, it's worth figuring out what you can do with it. Even if you didn't need it earlier, it's time to recognize that labor has become more expensive, and to understand that perhaps a plan that didn't require so much capital could now be turbocharged with that capital. So, basically, it doesn't seem like the VC business needs to be recreated -- just some business plans and expectations.


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