I’ve been in VC a little over 2 years now and always try to soak in as much knowledge as possible. I had to think about a few questions around the future of investing for my upcoming Kauffman module, so I decided to share my thoughts around the industry based off the insights I’ve learned from hard work and extremely smart people.
What have been the 3–5 most important shifts or changes that have affected the venture industry in the last 3 years?
The cost to start a company.
In 1999, everyone thought if there’s a high speed network and if everybody has a computer then the entire world would change. Unfortunately at the time was that there were only 50M+ people on the internet, half were on dial up, and the cost of building a company was crazy expensive (which lead to the infamous bubble). To build a simple company you needed 200 engineers, huge servers, etc. Fast forward now, there’s 3B people with access to the internet, instead of 200 engineers, you need two people with Wifi, and instead of paying for Cisco you can pay as you go with AWS or Digital Ocean. Because of this, companies are growing faster than ever. A few examples:
- Half of all time spent online in the USA is in smartphone apps
- There will 3x more smartphones than PCs by 2020
- WhatsApp sends and receives 30B messages a day with only 40 Engineers
- Airbnb has a high valuation, but are renting more rooms in NYC than Hilton.
Pocket Size Super-computers
Companies being built today are getting started from scratch creating brand new, worldwide behaviors. Everyone had a supercomputer in their pocket, access to a global high speed network, and unlimited computing capacity. The way an entrepreneur thinks about a solution to a problem is completely different now. Prime examples: Uber, Lyft, Airbnb, Zenefits, which deliver the entire stack.
Reconstruction of the datacenter (still learning)
Basically, the history of how storage and networking was built back in the day never considered the power of mobile, and for the first time cloud computing and how chips create brand new opportunities to make networking better, faster, and cheaper.
What are the most important uncertainties affecting venture in the next 3–5 years? (What is both meaningfully important and beyond your full influence control?)
- How do you give people access to wealth creation since nobody wants to go public?
- Companies are staying private longer out of desire and Quasi IPO are replacing actual IPOs. There’s a huge set of changes in the public market from 1995 — now. Being a public company isn’t attractive, much harder to do, and crazy expensive, so people are going public later.
- Private markets (people who used to invest in public markets) are now all investing in private companies. It’s interesting because liquidity for founders, investors, M&A, Debt, everything that exists in the public is still happening in the private market.
- Companies raising 1B (basically IPOs) aren’t regulated. They don’t have to disclose information like as opposed to what’s legally mandated with publicly traded companies.
- Valuations are high (also investors who don’t have experience in private market investing and are investing as though they are public companies).
- Startup costs have dropped 10x, but operating costs have increased 2/3x
- Traction and overall proof needed to raise the Series A are trending higher
- Way too much capital chasing seeds = there’s been a 10x increase in capital available at the seed stage, which is “forcing” larger rounds
What are you certain about regarding the future of venture? What do you believe is a “given” — something important that is unlikely to change regarding the future of venture?
I just decided to quote my General Partner Chris Dixon: “Great funds not only have more home runs, they have home runs of greater magnitude. Here’s a chart that looks at the average performance of the “home run” (>10x) investments”
The home runs for good funds are around 20x, but the home runs for great funds are almost 70x. As Bill Gurley says: “Venture capital is not even a home run business. It’s a grand slam business.”
If you could know one thing about the next 5 years with certainty, what would it be?
When will technology solve homelessness?