A Tale of Two VC Industries

A blog post by SuperAngel investor Fred Wilson of Union Square Ventures in NYC has struck a nerve. He argues that the venture industry is splitting in two: the traditional venture funds which focus on capital-intensive start-ups in info tech, biotech and cleantech, and the new emerging SuperAngel funds which focus on capital efficient software start-ups (many of which launch consumer Internet services). The capital efficient VCs focus on the "lean start-up" model, which I see coming from the Era of Cheap technologies that I discussed in the prior post on this topic. 

The traditional VCs have not changed their investment model; if anything, in the New Normal environment with few IPOs and low exits, they have doubled-down on putting even more money to work to build a few big winners. Looking at funding patterns within just one sector of venture, info tech, two different funding curves are evolving:

The whole SuperAngel phenomenon is getting more attention. A course will be offered at Harvard B-School next year to see how the lean model might apply to other sectors than software, including clentech, which is the most capital intensive sector. (Recent data says average first institutional money in is $30M with cleantech and under $5M with software.)  A tech reporter, the always-newsworthy Michael Arrington of TechCrunch, broke into a meeting of SuperAngels and came out claiming collusion! This is really funny since the SuperAngels represent a fraction of the capital in venture capital and blip of around 20 funds within a universe of almost 1000 venture funds - now the traditional VCs are worried about price-fixing from the challengers? 

What is going on is that the traditional VC industry, which has funded disruptive startups to take on other industry sectors, is now getting disrupted itself! 

The venture capital model tends to fit the dominant technology trend. In the Era of Cheap, the traditional venture industry is caught in the wrong model. The New Normal has highlighted the problem of the old model: more money pouring into fewer exits means really bad returns. In contrast, the new capital efficient funds promise much higher returns on smaller and quicker exits - plus they are picking up some wascally-wabid high-fliers like Zynga, Twitter or Groupon. Imagine their returns if they catch the next tech bubble as well. 

Comments

[Michael]

Anyone going short under 113.13 SPY today?

[Mamma Boom Boom]

- Long-Time Gold Bull Yves Lamoureux Says Why He's Quitting The Rally -

[nspolar]

Mamma, thanks for the gold bite.

ns

[Bull trader]

>Anyone going short under 113.13 SPY today?<

Heck no, shorting bull markets is not a wise strategy as bull market corrections are often quick and short.

Best advice is trade WITH the up trend, buy dips, add to longs on weakness.

[nspolar]

Apple is now world's second biggest stock

http://sanjose.bizjournals.com/sanjose/stories/2010/09/20/daily79.html?ana=yfcpc

Is the apple ready to fall from the tree?

ns

[Roger D.]

Hard to imagine a top with all this bullishness keep buying!

DJR Dow REIT Index Wave 2 top.

http://www.screencast.com/users/parisgnome/folders/Default/media/d8f9a903-4864-4969-b1de-6e2875be9d97

[Roger D.]

The expanding top in AAPL

http://www.screencast.com/users/parisgnome/folders/Default/media/b86ede2c-4918-45d6-8bc8-99efcbba7516

[Roger D.]

The Grand supercycle in Autozone monthly chart.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/8f1617da-b3d9-4d59-9ab2-4a516c6c0870

[Roger D.]

The top in Gold.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/ed580a29-7e95-4f9a-9969-84c5b6dcb6f1

[JT]

OMG!!!
Roger showed up.
You know what that means!

[Roger D.]

OMG JT I'm Back just to say this is as good a place for this market to turn in a big way as ever there was. As you can see there are 5 up on a lot of monthly charts here. Don't worry if this market has turned here we shall no pretty quick. Hard hats are to the left.

Roger D.

[Dsquare]

People are sure pissed (part of a letter to Buffet):

"You may be interested in knowing more details as to why I sold my shares, as the majority of letters that continue to pour in to Kiewit Plaza surely share a similar tone to this one. You and Charlie “Fear” Munger continue to misrepresent history, and that is why the public’s rage at you and at Wall Street grows with every passing day. And that level of anger will remain elevated and growing and directed at the miscreants known as the “bailout sympathizers” for as long as the unemployment rate does. We could and should have wiped out the “too big to fail” equity holders before we wiped out the tax payer. But that would have meant Berkshire’s precious book value would have taken a major hit, and so you used up all of a billionaire’s political capital and traded the ethics and morals you seemingly worked a lifetime to build, to prevent that from happening. Was that trade a good one?

And I have a big problem with that sir. When a select group of super-wealthy, elite, politically connected insiders are allowed to transgress a nation’s various moral, securities, and bankruptcy laws under the falsely dramatized “emergency” threat and guise of an Economic Pearl Harbor or a new Adolph Hitler (have you scolded FearMunger yet for his Antoinette moment to the University of Michigan kids?) to deplete its national treasury, and gets away with it....well then it is time for the “great unwashed” to be very concerned. And the guilty bailout offenders are very right to be worried of the social chaos that FearMunger warns us about, if WE are unable to “suck it up and cope!”

In perpetrating the greatest illegal transfer of wealth in the history of the world, you have lowered the capitalistic bar to an all-time historic low. This much I know: Despite your charitable efforts and investing acumen, history will not be kind to you for these repugnant actions, and your true legacy is:THE FATHER OF ALL MORAL HAZARD AND THE U.S. ZOMBIE ECONOMY"

http://globaleconomicanalysis.blogspot.com/2010/09/janet-tavakoli-on-myth-of-amoral-debtor.html

[Roger D.]

Looking for sub 2.00 TNX in 2011 down to 1.50 in the 3rd qtr '11. The disconnect between equity markets and short term rates will produce Prechter's collapse. The Fed's ZIRP policy has and will continue to decimate the general economy. Hello Japan II

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/2b5b8286-ab63-4511-8c0d-bad15feb4e3c

[Wave Rust]

JT
i don't have to trade every minute. in fact, i don't have to trade at all.

i went short on wednesday and am still short. i hope you are ok with me being short according to my trading plan. if you are not ok with that, well, maybe you will help me see the error of my ways.

Why don't you post real time all of your roundtrip trades each day for a week. maybe i'll learn something because i'm always willing to learn from others.

btw, it took a long time to type that post, but that's why trading 7-10 point ranges is boring if you are well into profit and have stops in place for every trade (a stop loss and an exit with profits stop. adjusting my stops during the rth is my exciting exercise.

trading like mad for 2 points here and 4 points there is too much work. i just hit the swings with a few or several K's and let the market pay me handsomely.

so when you're ready to start posting real time trades, i'll give a look.

wave rust

[Wave Rust]

yelnick

an incredible education gap is to blame for the outgoing tide of americans available for nontech and low tech jobs. the lack of americans for high tech jobs is well known.

everybody graduates high school believing that college is their ticket to affluence and a comfortable life. the uncomfortable truth is that most grads are not even close to being prepared for college. they can't read, write or do arithmetic. public schools are scamming the taxpayers.

to public schools, students are just a funding mechanism for their monopoly. if you know a teacher, then you likely have heard how hard they work and that they are sacrificing their lives to educate our nation's children. Teachers are the victims of some society ignoring their value.

I usually respond that their problem is that they are reaping the "rewards" of long term mediocrity of teaching standards and the socialist leanings of their leaders and of the group.
I add, produce a better product and people will respect you and pay you more.

they usually respond with 'send me better raw materials' from america's home. then I respond, that's the long term problem the education monolith created, parents that you left uneducated can't prepare kids for school. (thats as nice as i can say that). it only gets worse from here ,,, a dumber population is easier to control and squeeze into further government dependency.

tech is dealing with the same issue. successful low and high tech consumer products require more higher level educated brains to innovate and produce in the micro chip world, when the supply is shrinking.

a look at any university science faculty list speaks loudly with names most can't spell. We dont produce scientists anymore but other countries do.

I suspect in the next 40 years, the low tech jobs 'shipped' overseas will come back to the US, since what's left of the population that actually is willing to work, will be so dumbed down that they will be assembling plastic toys for the China McDonald's Happy Meals.

There's that productivity you are looking for! :)

wave rust

p.s. you are right about the movie. i knew the hint would give it away. but it is an amazing picture of the force and discipline of a resolute, ethical person. his simple view of what is right or wrong, what action to take, lessons learned and put to use, finding something that works and repeating it over and over ,,,, i could go on.

btw, the movie was much better than the book ,,,, the movie was a great story well told. but maybe it's just because I'm just a very simple guy who trades the same way he's always traded ,,, but getting better and better with every trade.

"I'm not a smart man but I do know what the markets do."

(i'm hoping that posting in non-trading hours is okay with the trader blog posting police here.)

[yelnick]

wave, I have a view from silicon valley which says value is created today at a level above manufacturing. In a post I called it the IP layer and got some pushback so more broadly a value-add layer, which unfortunately is not very descriptive. A poor analogy is to the genome - it was thought that once we deciphered the genome we could work miracles, but it turns out there is a layer of complexity on top (if not several) which makes living things work, and it is much harder to decipher than the gene pairs themselves. Similarly, we used to think manufacturing in the sense of assembling products was where value is created, but not it is clear that there is a layer on top. Most value is in design, software, algorithms, logic - not the physical stuff.

We can power huge economic value by leading in that layer above assembly, but we are driving it overseas. It is cheaper to et a chip designed in Taiwan/China than here. It is cheaper to ODM a gadget in Taiwan/China then here. Etc.

Instead we incent our best & brightest to work on financial algorithms to skim pennies in clever arbitrage, or into government to think of schemes to regulate business, or into academia to deconstruct texts.

[Roger D.]

This pattern shows up in the DJR,Dow,and the DAX. Looks like a large A wave with a adjoining B and then the C takes the form of a EDT. It has to be a rare bird. My guess is we get surprise crash wave from it,probably 1500 to 2000 points down.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/f25fe0ba-fbc5-402d-b83e-e348c72984c4