In January, Rick Segal wrote a provocative post that acknowledged some issues in VC land. He followed up with a little more clarification, and a focus on the software and web services space. His posts triggered a flare up of discussion, notably here, here and here. It’s been stuck in my brain ever since. Umair Haque, as always, has some fascinating thoughts on the subject, particularly as it relates to media. He makes a bold statement:
But let me be more honest than I perhaps should be: from my POV, as a strategy consultant at the intersection of exactly those spaces VCs are grappling with, the current state of VC is a full-on stall.
Segal argues that VC is ready for disruption due to a number of developments very much related to Web 2.0:
- The VC Rolodex is quickly being replaced by A-list bloggers.
- “No Money Down” startups can bootstrap with very little capital.
- Large corporations are tapping the talent pool of these no money down startups, and buying companies to capture the idea and the talent in house (which is something familiar to me and my Enboard partners at Tercina).
- Due to their small capital requirements, VC (and angel) legal costs and deal overhead are far too expensive for Web 2.0 startups
As Rick puts it:
And if, via my blog, boyish charm, and some luck, you do come see me, the 90 day due diligence, pref share cha cha, is not going to look particularly appealing vs. paying Master Card.
He posits an idea:
My working theory is that a â€œCapital firmâ€? with Esther Dyson, Mark Evans, Shel Israel, Doc Searls, Robert Scoble, Dave Winer, or some combination, might have value that, along side my money, could bring ideas into the mainstream in a much different fashion with great returns for all.
In some of my recent consulting work, I did research on “third system” financing models aimed at Culture sector microenterprises. This research points to a need for creative microfinance brought together with savvy business advice that allows the creative professional to do what they do best. This report from the UK [pdf] offers a good overview. One of the interesting models of so-called “social capital” is a model of regional development private equity funds for new media, seeded by corporate, public development agency and pension fund partners. What is interesting about the model as proposed is how the community in such a regional new media cluster assumes a role in vetting investments and takes a “social return” from the successes that is reinvested in the creative vitality of the cluster. Toronto has such a Web 2.0/new media/blogging community: TorCamp and NMBA and “the web 2.0 conference” guys.
Then, via John Unger (via Hugh Mcleod) I discovered Fundable.org. Of course, it’s not intended to fund startups. You can get together with your siblings to buy that home theatre setup for dad’s birthday, fundraise for a nonprofit or fix someone’s teeth. But the model is interesting because it is socially-enabled disintermediation and helps solve a couple of collective action problems: (1) who wants to be first in and (2) what happens when the funding requirements aren’t met? The community, in effect, does the due diligence.
I side with Rick Segal, Dave Winer and Umair Haque that we have a problem that needs fixing. There is a serious market failure going on between the current VC model and Web 2.0 startups. I don’t think that VCs reforming themselves is necessarily the answer, or at least not the whole answer. The VC’s role is to be there with the serious money when scale is the name of the game. But they need a better pipeline, and right now corporate acquisitions are taking the best talent and ideas off the table. This is bad for a number of reasons, but the Number 1 Issue (IMHO) is that this situation short-circuits the disintermediation and value creation potential of the business models made possible by network economics. Will NewsCorp figure out how to reintermediate peer produced media in MySpace? Maybe, maybe not. But while big media tries to figure out how to reinsert itself into the disrupted value chain, massive value creation potential lies dormant.
Local and global innovation communities are part of the answer. To quote David Crow, “community is the framework”. VC is part of answer, as is government and large corporations. Hopefully we can explore these issues more at TorCamp2.0 and the Web 2.0 Toronto Conference. I bet David and Tom Purves have some thoughts.