The Twilight of Venture Capital?

Former Enterprise Partners VC Bill Stensrud bows out of the business, saying for all to hear that the entire venture capital industry has outgrown its usefulness. With charts of dwindling IPOs and the discussion of a lack of new tools, I thought he was telling us that innovation in 2009 was dead, or that the VC model was simply broken. It’s actually a more interesting argument, though.

The burst of invention and commercial success which was initiated by the invention of the transistor has run its course…The rapid evolution of new tools is over and will not resume until and unless there is another fundamental technology innovation comparable to the transistor.

I know of no example of an industry which conducted an orderly and systematic downsizing when the opportunity it addressed disappeared or radically changed. We can look around at the auto and recording industries for recent tragedies. The Venture Capital industry is no exception. Instead of recognizing the handwriting on the wall, VCs are inventing new places to put money and trumpeting the “opportunity” they represent.

Stensrud’s argument is that the VC industry was a sort of business “design pattern” that grew in parallel with the invention of the transistor and its many follow-on technologies in the 1960s. Now in 2009 the disruptive innovation that this match spawned — virtually the entire technology industry — is over. The technology industry has grown to be a cornerstone of the US economy. The disruption was successful and the disruptors have become the establishment. The VC industry scaffolding that helped to build the technology industry is still standing, however, and is completely overkill for the minor innovations of the now established technology industry. And there are no new promising technologies comparable to the transistor on the horizon that merit that apparatus.

While I agree with his point about *fundamental* innovation from the transistor probably having run its course, I don’t have the same pessimism about the VC model or the absence of new tools. Yes, right now there may be too much money running after too few deals. Yes, clean tech may be over-hyped as an opportunity. It is interesting to think about the venture capital industry as a design pattern that complemented the dominant technology of its time and is thus unsuited for today’s new technologies, but I would be surprised through if the industry did not a) reconfigure in size and scope for different innovation and technology commercialization challenges, or b) simply turn to new fields where it could provide a repeat performance of past success.

In 2009, there is probably more fundamental research going on now than ever before, and many industries (and future industries) that could yet benefit from that VC industry-creating scaffolding. There is surprisingly no mention in Stenrud’s entire post of the life sciences, a non-transistor-based industry which has certainly been accelerated by venture capital over the past twenty years. In fact, I would bet that the life sciences are where those missing “new tools” for the next half-century of disruptive innovation are going to emerge.

via paul kedrosky

One thought on “The Twilight of Venture Capital?

  1. wow, awesome post Chris, and very interesting analysis. I’m also curious to see if the VC model is adapted to other industries absent more tech innovation. that said i recently listened to a podcast by Tom Friedman where he argues — at length — that most businesses haven’t yet begun to truly shape their business models around the transistor (he mentions e-checkin systems as a notable start)
    according to friedman an entire tech-based transformation of the world economy is still ahead of us, similar to the transformation that occurred after the ready availability of electricity. if that holds true, i’ll be surprised if the VC industry doesn’t find a role to play…


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