Andrew Chen, Quibb, Uber

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This makes me wonder - Most industries have a differentiated (high margin) winner and low-cost (high volume) winner. As most players in Venture migrate towards a differentiated strategy do they create an oppty for low-cost player ? What would the ryan air of VC look like?

Scout Ventures, Dozen Digital

Interesting. Two thoughts:

1) Definitely think Angelist (and other platforms) will accelerate this trend. Early stage capital is going to get commoditized really fast in the next 3-5 years. VCs will have to pitch to entrepreneurs that they're more than capital even more than before.

2) As Fred's article points out, while its easier to start a company now, its just as hard, if not harder to build out a big company. User acquisition competition is really tough, without the quick/easy wins of 5 years ago when there may have been only 1 or 2 other companies in the same space. Lots of distribution opportunities but they're outpaced by the number of startups looking for distribution, imo. This means VCs that can demonstrate ability to help early stage products operationally (marketing, BD, hiring) will be able to get those attractive early stage deals.

Partner at USV

I really wonder if you are relying on your VCs for this, if that is a good thing or not: "This means VCs that can demonstrate ability to help early stage products operationally (marketing, BD, hiring) will be able to get those attractive early stage deals."

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Scout Ventures, Dozen Digital

Definitely not a good thing to rely on VCs for this, and thats not what I was suggesting. Just saying that operational advice is a value-add that may become even more important, especially and primarily at the seed stage.

I’m not sure how strong of a differentiator services still are. I think to some extent they’re more of a survival strategy. Or to be more exact, services are only a differentiator to the extent that the service is excludable. The early movers have already capitalized on the intial differentiation and occupied the top slots where the feedback effects of signaling, brand etc come into play and protect their position. Being willing to move fast on a convertible note used to be a differentiator, but it isn’t any more. Services seem to be following roughly the same pattern.

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Other disjointed thoughts:

* The exceptions are probably services that are somewhat excludable, like deep specialization in a particular sector, or access to certain proprietary relationships.

* There is probably some room for differentiation in services that aren’t excludable if it provides a window of opportunity to break into the ‘elite’ group. Large funds with a seed program could also probably just throw more money at it (laundry service and daycare for everyone!) to get ahead of smaller funds.

* Drawing a parallel to universities is a pretty interesting exercise in this context, especially with the current (partial and in-progress) unbundling of education. My best guess in both cases is it’s hugely disruptive to the middle of the pack while leaving (most of) the elite incumbents who follow and the first few newcomers on top.

* The feedback effect of signaling applies to more than dealflow in the unbundled service led economy. Just like the best profs want to work at the elite universities, the best advisors will want to associate with the elite firms, they can recruit the best for their services team, etc etc

* Another exception is untapped markets. A seed fund providing services in India would be number 1 overnight. Hell, a seed/angel investor who offered term sheets in less than three months would dominate.

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Agree with you that the first wave of differentiation is already upon us. How much better at general distribution/operational experience can you be than say Andreesen Horowitz? But the next wave of funds will be around verticals -- regional insights/expertise, functional/industry expertise, etc. In some sense, it's like how the web evolved. We started with Craigslist, but now there are lots of companies tackling and specializing a particular area that Craigslist broadly addresses. But, there will be room for both the specialized players and the more broad players, because there are also be way more companies that are seeking funding than before.

Content Marketing at mfishbein.com

Some of the biggest forces changing the industry in my mind include: 1) startups have less need for capital then ever before because the cost of building a company has decreased, 2) Angellist has made it easier for any investor, including LPs themselves, to source high quality deals, and 3) getting access to the best deals has become quite competitive, and is extremely important given such a high percentage of VC returns are generated by the top decile of deals.

Given that, the value propositions that VCs have traditionally been offering to both entrepreneurs and LPs is weakening. As you say, VCs are now trying new models to stay competitive and get access to the top deals.

The key questions I think VCs should be asking are 1) What do the founders of the best deals actually want? (ie money, services, expertise, clout, etc) and 2) Can delivering that value to founders make for a good business?

I think it might take a couple fund cycles to play out, but I think non-top-tier firms will change a lot.

Strategy Manager at LendingTree

How does crowdfunding come in this? Will it impact VC and make it "lean"?

We should talk. I may know something about this. :-)

Partner at USV

fwiw Andreessen Horowitz gets lots of well-deserved press for the "services" layer but I think there are innovations from that fund that are more fundamental. One is an enternally optimistic view of the world and the role technology plays in the world. It's hard and stressful to start a company! I would want an optimist on my side.

Unstructured Ventures, Foresight

Couple thoughts:
- The services swing is part of a cycle, and not necessarily an irreversible trendline. Incubators were very popular 10+ years ago, then not popular, now a bit more popular.
- If a lot of firms get fat, then it will probably make sense for some firms to get lean.
- Funding a larger staff takes more money, and the unbundling has limits. Only the largest firms (or the firms that are willing to carry higher staff costs) will invest in a costly services team.
- Will growth VCs build services teams, or is that just an early-stage need?
- Beyond marketing, the real next step could be in VCs building products, networks, or communities that they can leverage for their startups. betaworks's Openbeta is a good example of this, a nontraditional way to help build a VC-owned distribution channel for their investments. (For other ideas, we should talk :)
- And what happens when more seed money comes from less experienced investors? I don't think it changes everything, but it will be a new source of capital for entrepreneurs that brand-name investors would be intelligent to leverage appropriately.

Partner at USV

This: "Beyond marketing, the real next step could be in VCs building products, networks, or communities that they can leverage for their startups."

Perhaps a peer network of services (as opposed to centralized) can be just as effective. We certainly think so

Totally agree. 500Startups partner Paul Singh, for example, built a product called dashboard.io, which the 500 network utilizes to facilitate peer-to-peer office hours, networking, and intros. I would guess YC has something similar. And, I think this is just the begin of the productization of some of these services that investors can provide.

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Unstructured Ventures, Foresight

Agreed. They don't need to be proprietary. Just need to be able to access.

Applications and Integrations Lead, Technical Services Engineer at MongoDB

I'm going to agree on this point also. Currently VCs are in the business of providing capital primarily, connections and advice secondarily. Since, as others point out, access to capital is plentiful/less capital is needed/information about obtaining capital is constraining what VCs could ask for, I think we'll see more homogenization of terms and process to funding. The area for differentiation then becomes connections and advice. I think Paul is hinting at a new potential business model and honestly if it were me I would commercialize that platform.

At the idea level both are fine strategies and both are not mutually exclusive but I think what would be really interesting is to see the actual value that startups get from the full service range. With all due respect to some folks on this thread, the reality hasn't really matched the advertisement from the founders I have spoken to. It's also ironic that firms with tens of millions and sometimes hundreds of millions of annual management fees have essentially been outcompeted by folks like First Round and 500 Startup who are doing the same sorts of things with fractions of the resources.

To me AngelList syndicates will move the conversation back to the deep personal relationship with a "GP" who now has greater incentive and financial fire power to make money investing and hopefully some of the great founders choose to take investing more seriously over time (10 micro vcs to 100s).

Partner at USV

this is a good outline. Two points - first, maybe consider the effect of angel list, circle up, others that "unbundle" vc fund raising from the decision making of making investments.

Second, I dont think there is a one-size-fits-all here to this unbundling. There are some firms that will be fine and do well without, say, a layer of services team. We may begin to characterize as boutiques (Benchmark, USV come to mind) but regardless they will operate in a different fashion as you list above.

Monoculture in either direction - old school or new school - is never good.

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Advisor at MessageMe

double down on the "barbell strategy", i don't think people emotionally understand it (me included) -> http://www.valueinvestingworld.com/2013/04/nassim-taleb-and-barbells.html

Great insights! You touched on the new entrepreneurial energy in VC already but just wanted to highlight this again as I think it generally goes unnoticed in the discussions about the changes in VC.

VC is just like any other industry in that when fundamental changes in the environment open up new opportunities, the entrepreneurs flock towards that industry. Due to the reasons many people have covered (high market risk low technical risk, lower cost to start a company, more accessible distribution channels that really empower technical entrepreneurs), true entrepreneurs have been flocking to the industry over the last 4 years or so.

The best example of this is a16z with Marc and Ben - 2 of the greatest entrepreneurs of our time have decided that this opportunity is large enough to build their next startup for (after one guy kicked off the internet revolution and the other built one of the first cloud companies). When you look at a16z and the new crop of VCs from that lens (including Angelist) it is much easier to understand the fundamental difference in this new generation of VCs - they are on a mission to change the world, and not just through the companies that the invest in.

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I'm skeptical about long term differentiation being available from a shared services or consulting model owned/operated by a VC firm. Seems a lot to me like the "incubator" model in new clothing. Feels like VCs are signing up to all the challenges of building multi-discipline professional services firms but with a client base (startups) who have much spikier demand profiles and all the challenges of running a suite of shared services businesses (fractional CFOs, employee perks programs, etc.) with sub optimal scale given they are only for their portfolio clients. Works (for some for now) but I think in large part this is because startups don't know that they are paying extra for these services in the form of lower valuations. As transparency of valuations increases (thanks angelist) and as alternative advice (thanks startup weekend, techstars, etc) and market driven shared services (thanks zenpayroll et al) become more widely available I think we revert to a smaller, more focused partner driven model. In the end I think any startup should be happy to "pay" Marc, Ben, Fred or Albert for their insights, network, etc., but I'd be hesitant to pay for my pro rata share of an SEO expert or for HR on call support etc.

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