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Why the Structural Changes to the VC Industry Matter | Andreessen Horowitz


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End-user markets are much bigger than in previous decades.

The internet population (now exceeding 2.5 billion) is 10x what it was in 1999, and rapidly growing around the world. Tablets have overtaken PCs as the compute medium of choice, but the real transformation is in smartphones. Of all the cellphones in use today, only 30% are smartphones. If you believe, as we do, that there will be a wholesale conversion of this remaining 70% to smartphones — which are really broadband-enabled supercomputers that we carry around with us at all times — the opportunity for successful companies to reach ever larger markets is unprecedented.

This is is not just a consumer trend: Enterprise adoption of mobile technologies and the proliferation of SaaS as a software delivery vehicle means more users within companies and government agencies will deploy more applications than ever before. And the security, identity management, and core infrastructure needs to support these applications will grow accordingly.

But the biggest transformation of all is in who can be reached. With potentially 5.9 billion users coming online — largely due to the developing world — we have the ability to reach global markets at a scale never before witnessed. Already more people have more access to mobile telephones than they do toilets.

Now more than ever, companies, products, and venture capital are winner-take-all.

So now more than ever we have a missing tier for funding and the gap between traditional angel funding and an institutional VC round is bigger than ever.  I understand there are superangels and superangel groups now and smaller, boutique VC funds, but both are just as risk averse.  Reducing risk from seed to series is definitely not as flat of a curve as it used to be.   One of the reasons that is always cited is that investors have too many good things to invest in now, so it's a funder's market.  I guess that's just another way of saying they made too many bad investments for a while and they don't have enough people-time to clean up any more companies.

That gap between what angels will fund and what venture capitalists will fund has gotten wider.

The disappearance of those funds in the middle -- the $500mm funds that the article refers to -- can be construed one of two ways:

1. The risk compared to the reward is not worthwhile.

2. There is a giant inefficiency in the market that will eventually be filled.

I don't think it's reasonable to tell companies to raise their first $5 million as seed money.

It may be less expensive to start a company but achieving product market fit costs as much as it ever did in most cases. Perhaps the new venture capital system only wants the exceptions to the rule, and that's how they've chosen to eliminate risk.

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