Venture Capital Duality

It’s a theme as old as Dickens and reflects both a central tenet of biology and the basic economic belief that as an industry matures, it divides.  Fred Wilson sees the venture capital industry increasingly split into two parts:

“The first VC industry is investing in software based businesses. The software VC business has been fundamentally altered by the massive decrease in the cost of building and launching a software based business. I don’t think I need to explain why this massive decrease in cost has happened to this audience. We’ve talked about that ad nauseum here and on other tech blogs.

The second VC industry is investing in cleantech, biotech and other capital intensive tech businesses that have economic models that have not been fundamentally altered. This VC industry operates largely the same way it has operated for the past twenty or thirty years.”

This split now means that there are essentially two separate venture industries, each with their own dynamics and different risk-and-reward structures.  It’s a compelling thesis, and certainly reflects many of the continuing changes with both funds and entrepreneurs.  Jeff Bussgang takes this approach to the next logical step and asks if the lean start-up approach so prevalent in the software industry can also be applied to more capital-intensive businesses, with two case studies of venture investments trying to do just that.

As a final caveat, Paul Graham turns this analysis inwards and sees the venture industry mirroring this bifurcation due to the new entrants of Super-Angels — individuals that invest other people’s money as well as their own. He maintains that the overall impact for entrepreneurs is positive, with higher valuations, faster decision-making, and better terms.  Like cell division, it’s fascinating to watch and hard to predict what will eventually emerge.