[tt] Tech Making Traditional VCs Obsolete

[Brian Atkins]

http://www.wired.com/techbiz/startups/news/2008/08/portfolio_0829

Ah, those Sand Hill Road visionaries, the venture capital guys who finance the 
future and dictate the trends. It must be fun out there, getting the first 
glimpses of tomorrow. But suddenly there's a wonderful irony at work: That very 
future is destroying their industry.

Newspapers are rife with stories about the decline of big V.C. investments, 
pointing to the trend as a sign of a more conservative investment environment. 
But I don't think that's really the issue.

Instead, something much more profound is going on: The basic V.C. model is 
broken. And new technology is driving a much more efficient system for capital 
allocation to startups.

In fact, technology is largely at fault both for what's wrong with the V.C. 
world and for what's replacing it. The problem with the industry is this--it's 
just too cheap to start new companies these days.

Virtual offices allow talent to gather from around the country to work on a new 
idea without having to quit full-time jobs too early. Servers, computers, and 
bandwidth are essentially free, and a robust telecommunications platform can be 
rented for a few tens of dollars a month. Software development can be outsourced 
without taking on big fixed costs. There are countless programs to manage 
customer relations, mine contacts, handle the books, and plan and monitor 
projects. And of course, the internet has reduced the costs of finding customers 
and testing new concepts to nearly nothing.

Okay, so what? Well, the classic V.C.'s simply have too much money under 
management, and too expensive a talent pool, to waste time looking at investing 
anything less than $10 million in a project. Meantime, no entrepreneur wants to 
give up equity by taking in more money than he absolutely needs. So, when it 
only costs a few million to get a serious new company off the ground, how can 
the V.C.'s really play? They have to find places to make gigantic gambles, 
usually overpaying because the other big V.C.'s are also trying to invest in the 
few really big-dollar opportunities out there. It has become a system doomed to 
failure.

The flip side of the story is the rise of angel investor groups. These 
investment consortiums have always been ideally positioned to provide $500,000 
to $5 million equity injections; but until recently, that wasn't enough to get a 
serious effort off the ground. More fundamentally, however, they have 
historically not been terribly investor-friendly, largely because the individual 
members have other occupations.

The individual members didn't work in the same place or even at the same times, 
so angels were terribly inefficient at evaluating transactions, sharing 
information, and negotiating and documenting deals.

Those days are over, thanks to software developed by David Rose, founder of the 
New York Angels (yes, I belong). Angelsoft is a wonderful collaboration platform 
that manages deal flow, helps match talent and expertise to projects, provides 
easy-to-use data rooms for potential investors, and generally drives the 
investment process. It combines project management and social networking in a 
way that, for the first time, makes the angel process efficient for both the 
company seeking capital and the potential investors.

The big news now is that, in a period of just a couple of years, over 400 angel 
groups around the globe have standardized on the platform. That means, of 
course, that they will also be able to share deals between themselves, vastly 
expanding the capital and expertise available for any given project.

And entrepreneurs can now create one submission to get access, literally, to a 
world of sophisticated, organized investors. It sounds like a revolution to me. 
Check it out at the group's website.

And so, once again, technology is driving a paradigm shift. But this time, it's 
France in 1789: The progenitors of change are becoming the victims.

-- 
Brian Atkins
Singularity Institute for Artificial Intelligence
http://www.singinst.org/