VCs disrupted by Angels thanks to Cloud, Apple, Google and Facebook

How too many investors can lead us to irrational exuberance 2.0

Fred Wilson, managing partner at Union Square Ventures is one of the most well-respected VCs around and does an amazing job with his AVC blog – it is in many ways a blueprint to starting a company. He has had so many good posts over the years it is tough to count.

In a recent interview with Technology Review he made some alarming comments which you should be aware of. He says VC firms are having a tough time raising money because returns have been mediocre. Amazingly, he describes “mediocre” as anything less than three times your money in a ten-year period which seems like an incredible return to anyone who hasn’t put all their investment dollars in Apple or Priceline.

He goes on to say venture capital is the best place to get money where a company has high risk but a large upside. He continues by saying that many IT companies can get going nowadays with money from Angel investors without the need for VC investments. This is exactly what David Rose alluded to when he keynoted the DevCon5 HTML5 conference last year in New York. The reality is the cloud is making it really easy to launch new companies.

Moreover, it is worth pointing out that ecosystems built by Apple, Google and Facebook make it infinitely easier to launch successful products as you can piggyback and augment products and services and instantly have access to hundreds of millions of potential users and customers.

Consider also that the freemium concept has allowed companies to instantly become juggernauts in their spaces. Skype is a great example of a multibillion dollar valuation put on a freemium service. LinkedIn at over $11B in market cap is another.

He continues to say one of the problems the industry faces is that there are a lot of people chasing a few big-name firms and moreover most of the money is tied up by “six white guys” who control two-and-a-half billion dollars. He feels this money would be better allocated to 25 firms where each has $100 million.

My thought process on the matter is the advent of cloud and ecosystems allows so much more innovation that the VCs are being disrupted by the angels. It is unclear if the market would be better served with more wealthy investors because it requires a tremendous amount of restraint to be a good investor in a heated market.

How many people went out and purchased homes which were larger or newer than they really could afford because everyone else was? How many of the smartest people on Wall Street bet their futures on complex derivatives that even Warren Buffet said he didn’t understand – because, everyone else was doing it? How many people invested in numerous CLECs, fiber and Internet companies in the nineties because everyone else was doing it?

From what I am seeing in the market the competent people are getting money and the ones who have less competence are struggling. I don’t mean this to be declarative – there are always exceptions but in general, there seems to be a balance of good ideas and people getting dollars to start and grow their companies.

So I do have to disagree with Fred a bit on this last point – if only because I don’t trust a plethora of VC firms to not lead us to irrational exuberance 2.0.

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