![]() Sure, it’s the end of venture capital as we know it. As Lessin puts it, his argument’s impact on seed investing is “far less clear.”Īgreed. The obvious critique of Lessin’s argument is one that he makes himself, namely that what he is discussing is not as relevant to seed investing. The result of this, per Lessin, is that venture “firms that grew up around software and internet investing and consider themselves venture capitalists” must “enter the bigger pond as a fairly small fish, or go find another small pond.” Yeah, but The result of all of the above is Lessin’s lede: “All signs seem to indicate that by 2022, for the first time, nontraditional tech investors - including hedge funds, mutual funds and the like - will invest more in private tech companies than traditional Silicon Valley-style venture capitalists will.”Ĭapital crowding into the parts of finance once reserved for the high priests of venture means that the VCs of the world are finding themselves often fighting for deals with all sorts of new, and wealthier, players. Their return profile might change, with cheaper and more plentiful money chasing deals, leading to higher prices and lower returns. ![]() If there is less risk, then venture capitalists can’t charge as much for their capital. You can see where this is going: If that’s the case, then the model of selling expensive capital for huge upside becomes a bit soggy. Or, as Lessin puts it, thanks to better market ability to metricize startup opportunity and risk, “investors across the board price more or less the same way.” With more capital varieties taking interest in private tech companies thanks in part to reduced risk, pricing changed. Lower risk meant that other forms of capital found startup investing - super-late stage to begin with, but increasingly earlier in the startup lifecycle - not just possible, but rather attractive. So, prices went up for software companies - public and private.Īnother result of the revolution in both software construction and distribution - higher-level programming languages, smartphones, app stores, SaaS and, today, on-demand pricing coupled to API delivery - was that more money could pile into the companies busy writing code. This made the revenues of software companies less like those of video game companies, driven by episodic releases and dependent on the market’s reception of the next version of any particular product.Īs SaaS took over, software revenues kept their lucrative gross margin profile but became both longer-lasting and more dependable. The process of building software and taking it to market became better understood by more people.Įven more, recurring fees overtook the traditional method of selling software for a one-time price. Founders could lean on AWS instead of having to spend equity capital on server racks and colocation. The Wall Street crew just gets a final lap at the milk saucer. The prices that venture capitalists have historically paid for startup equity in high-growth tech upstarts make IPO pops appear de minimis it’s the VCs who make out like bandits when a tech company floats, not the bankers. Thus, venture capitalists sold their capital dearly to founders. Higher-than-average investment risk meant that returns from winning bets had to be very lucrative, or else the venture model would have failed. Lessin notes that venture capitalists once made risky wagers on companies that often withered away. (For fun, here’s a long-ass podcast I participated in with Lessin last year.) A capital explosion This will be fun, and, because it’s Friday, both relaxed and cordial. But I don’t fully agree with his conclusions, and want to talk about why. ![]() Its author, Sam Lessin, makes some pretty good points. Venture capitalists are chatting this week about a recent piece from The Information titled “ The End of Venture Capital as We Know It.” As with nearly everything you read, the article in question is a bit more nuanced than its headline.
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