Venture capital has been a major part of the economic landscape for decades, but with the rise in popularity of blockchain and new cryptocurrencies it’s time for an update. The next generation of VCs will invest more heavily on projects that provide long-term value to society as well as companies focused on sustainable growth.
When Stu Phillips publishes on Soaring on Ridgelift, I try to read it. He’s an entrepreneur and a venture investor. He’s also a clever guy, thinking about business, and a terrific writer, based on his blog postings. And his most recent article, on the future of venture capital, is crucial. He accepts that there has been a lot of discussion about venture capital being broken, but he disagrees.
The architecture of the venture capital sector, like any “system” that has been “improved” over decades, isn’t broken, but it does have basic faults that impede or even restrict its capacity to adapt to new market needs.
Rather, he claims, venture capital is in the midst of a “architectural transformation.” He mentions the following four factors:
- There is an excess of capital. Isn’t it intriguing? You wouldn’t think that would be an issue, but it turns out to be.
To create an appropriate rate of return, the flow of money into venture funds is not balanced by the market exit possibilities (IPO, M&A).
- There isn’t enough knowledge. Also fascinating, but a little scary, since the VCs I’ve interacted with throughout my career have always been at the apex of the startup world. “A lot of clever folks with very little operational experience,” Stu explains. Consider the following:
You wouldn’t want a medical treatment done on you by someone who had been trained but was about to undertake their third or fourth. However, in the venture capital market, this has occurred with new VCs sitting on the boards of private firms, providing guidance and business counsel. The fast expansion outstripped the ability of the seasoned VCs to coach the newcomers to the company.
- The impact of the Internet. My particular favorite is this one. Fascinating. It’s a “little-known side effect” of greater information flow and lower latency, according to him.
However, this same enhancement implies that ideas, concepts, issue descriptions, and other information move fast and are known by a large number of individuals. The time advantage of expertise has reduced, putting a greater emphasis on being the first to market and faultless execution.
- Markets for technology have reached maturity.
So, where do we go from here? He offers an intriguing perspective on the decline in startup and venture capital searches. He claims that venture capital 1.0 was the creation of Silicon Valley (my interpretation, not his) and that venture capital 2.0 was the internet boom.
And what exactly is 3.0? It has yet to be decided. Phillips doesn’t even make an educated assumption. But it’s worth reiterating his conclusion regarding fire or water:
Big difficulties or unfulfilled wants light a fire–a there’s lot of suffering and a lot of need. If you want to play with fire, you must be meticulous in your execution. You won’t get a second opportunity, and VC investors should pull their money out the minute execution falters or someone else outperforms you.
Difficult issues or developing trends might benefit from a water erosion strategy. Like a river, relentless and sluggish, or like ice, entering into the crevices and freezing to break down the issue quickly. Build entry barriers through basic intellectual property, effective execution, and smart resource allocation, as well as deep and significant strategic connections with existing organizations who recognize their need for your assistance.
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Frequently Asked Questions
How long is a typical VC investment period?
A: A typical investment period is 2-5 years.
How long does experimental cycle takes in a venture take?
A: The time it takes to complete an experimental cycle is determined by the level of risk you are willing to take.
What is the third stage of venture capital financing?
A: The third stage of venture capital financing is the final round.