Venture capital's model battleSeptember 3, 2013: 4:02 PM ET
Defending the defense of venture capital "classic."
FORTUNE -- Here are three things I believe about the venture capital industry:
- 1. Until five or six years ago, the venture capital model was largely unchanged from what it had been in the 1980s and 1990s. Different people and bigger dollars, but the same general structure and strategy.
- 2. Today there are a variety of new models. Some focus on providing a variety of non-finance services to entrepreneurs (marketing, HR, etc.). Some borrow from the crowdfunding model. Some emphasize their ability to make decisions in less time than it takes a "traditional" VC to iron his blue shirt.
- 3. We have no idea which model is actually better, from the perspective of generating high returns (which is the actual job of venture capitalists).
This is all in the context of a weekend post by Sarah Lacy, titled "A rare defense of venture capital classic." It sought to tamp down on the reflexive notion that newer is better, or that VC firms must become "platforms" in order to achieve future success. Instead, she argues that the fundamental characteristics of today's VCs are the same as they were in past decades -- no matter whether their model is considered innovative or traditionalist:
Yes, things have changed about venture capital since those halcyon days of silicon assembly lines and fruit orchards. Typical venture firms invest later and get far smaller stakes than they did 50 years ago. Deal flow is far less proprietary in an age of demo days, tech blogs, and AngelList. And we've learned that many people are just awful at the job of venture capital...
But VCs who perform well aren't doing it, because they are jumping on the bandwagon of new marketing trends. They are doing it because they are good VCs the way Arthur Rock, Don Valentine, and Tom Perkins were good VCs. They take risk. They coach entrepreneurs. The respect an entrepreneur's plan, even if it deviates from their own. And most of all — they have millions to invest in each company.
The reaction to Lacy's post has been fairly predictable. "Classic" venture capitalists have publicly thanked her, while some next-gen VCs have taken her to task.
What most of the responses missed, however, was that Lacy wasn't really taking sides. Instead, she was seeking to guide entrepreneurs through the disorienting haze of VC self-promotion.
More importantly, taking sides right now is a fool's errand. As I wrote above, there is not yet enough data to support a conclusion about which type of model works best. Remember, it's only been four years since Andreessen Horowitz raised its first fund. Neither AngelList nor Dave McClure's 500 Startups showed up until 2010. For context, the Massachusetts state pension system only discloses returns for VC funds that are at least five years-old, because it finds earlier results to be statistically irrelevant (a common sentiment, due to the so-called J-curve).
Even First Round Capital, arguably the new model's godfather, was founded less than a decade ago. And while its returns so far have been very strong, they are not necessarily better than those produced by Foundry Group, Spark Capital or Union Square Ventures -- all relatively young firms that primarily employ classic models. Or an older firm like Kleiner Perkins, which has an HR partner, marketing partner, etc. (and has for some time).
What we really need is more time to see if there is a statistical differentiation between new and classic VC, or just several outliers in both camps. If the former, then the "losing" side will need to make adjustments. If the latter, then it would validate Lacy's central thesis (which isn't terribly well-served by her post's title).
In the meantime, today's entrepreneurs shouldn't judge a VC firm by its model. No matter how novel or antiquated.
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