An important article appeared in the WSJ over the weekend called “The End of Management”. [apologies in advances if they kibosh the link; trust me, it was epic]
The basic thesis is that given decreases in coordination costs, the costs of scale have begun to outweigh the benefits of scale, calling into question the entire idea of the corporation. Interestingly, the subtitle is “why managers should act like venture capitalists”, but I’m more interested in the implications of the piece for the venture capital industry itself.
The fact is, the venture industry has matured, and matured in a somewhat of a mediocre way. Economic theory and history would suggest that the industry should consolidate around a few large firms. In fact, the dominant trend is the opposite … many large firms are losing “customers” (both investors and entrepreneurs) and shrinking/going away, while the firms taking market share are relative newcomers (see: the Book of Dixon and the Book of McClure).
The unfortunate facts of the case for large venture firms are that scale has gone from being a significant advantage to being a crippling disadvantage. The same problems that beset large corporations (bureaucracy, principal/agent mismatches, the inability for small wins to move the needle, the inability to pick a focus and win a particular segment) are plaguing large venture firms in spades. The benefits of scale (deep pockets, brand name, the experience of having lived through cycles, robust compliance/regulatory/back-office infrastructures) are real, but are less important in an era where those things can either be obtained through relationships, bought on a variable cost basis or built quickly and cheaply. Or, somewhat cynically, be systematically discounted and disparaged by more nimble competitors, such that they at least appear not to matter.
One interesting example of this is the question of experience. Fred Wilson has a thought provoking post about the impending adolescence of the current burgeoning crop of start-ups. He notes one fund he is an investor in who has called down 40% of the fund in the first 6 months. Anyone who was in the business in 1999 knows the kind of frenzy that drives that type of activity, and fears it. Fred can get away with this type of avuncular commentary, but this kind of talk from a GP at a mega Sand Hill Road firm would be treated as condescension and “not getting it”.
At Village Ventures, when we got started in 2000, it was the era of the mega-funds. Our thought was that there was a way to get the benefits of scale without the costs by creating a platform of shared services and a forum for sharing experience and resources, and offering that to smaller funds, who could be nimble and focused. 10 years later, we have 15 firms on the platform, with almost $1B in capital under management, and a strong track record of performance. We’ve made our share of mistakes but I still think the idea is right. I continue to think that ignoring all of the benefits of scale is a mistake, and that there are ways to harvest them without the sclerosis of being too large (Fred’s wisdom about pacing and reserves being one example).
The most interesting thing about the article, and about the current trends in venture capital, is that they hold the potential to be secular trends, not just cycles. The skeptics (usually me) tend to see such phenomena and say “ah, just wait until Sacca et al raise their $500MM funds, so they can ‘participate more fully in the pro rata rights they are creating’ … and then raise a hedge fund so they can buy at the IPO as well”. I don’t think that will happen, and if it does, that will be the road to ruin for them as well. For my money, in any of the digital disciplines, small funds are here to stay.