VC

The Great Unbundling of Venture Capital

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This is the third post in my ongoing Series on Technology, Disruption (and Chess). In the previous post I contrasted the old world of closed or hidden knowledge with the new landscape of open knowledge in which we are living. I also described a framework that I think is helpful for entrepreneurs, investors and technologists as they search for opportunities within sectors that have been or are in the midst of being disrupted by technology/software. In this post we will examine the world of venture capital- an industry that is well along in experiencing this phenomenon of "software eating the world". It's being unbundled before our eyes. Here's my effort at describing this evolution, layer-by-layer:

 

First Layer: VC Bloggers, The Funded

fredwilson
fredwilson
naval
naval
dhornik
dhornik
feld
feld

I see the first layer of the 'laying bare of VC by technology' as the phenomenon of VC's actually blogging about their business. This essentially started in 2003 with guys like David Hornik, Naval Ravikant at August Capital and then guys like Fred Wilson and Brad Feld as the pioneers. (Again we see the phenomenon of some of the most respected and talented practitioners having the confidence to embrace change and experiment with new platforms). Venture Hacks (by Ravikant and Babak Nivi) was also excellent but came later. Many followed when it was considered "safer" to blog and they figured their LP's wouldn't incinerate them. As always, the laggards came in at the end when they realized they "needed to blog to exist" and compete- and of course most were terrible at it and just imitating the leaders and often ended up just lazily pimping their portfolio companies. There was also Adeo Ressi's "the Funded" in this first layer- a site that had the nerve to let people rate VC's anonymously. It enraged many a grumpy investor. How dare they! But it was definitely one of many influences on VC behavior that emerged during this new era of "exposure".

So what exactly did those blogging pioneers do? They actually talked  explicitly about what they were looking for, what a term sheet was all about, how to get in touch with them, and all the formerly hidden tricks (such as 3x liquidation preferences & taking the option pool out of the entrepreneur's hide) that VC's and their counsel employed so often against uninformed and unprepared entrepreneurs. There was a massive knowledge gap that had been used against entrepreneurs- but the more this knowledge was disseminated during this "First Layer", the more the power dynamics shifted away from the VC's.  The "black art of VC" was being 'laid bare' in this sense. And what exactly did this lead to?

  • Entrepreneurs were no longer in the dark and suddenly knew what the game was. Few before them had ever known.
  • Low-life VC's asking for 3x liquidation preferences were exposed for what they were and became dinosaurs.
  • Bad VC behavior was discussed openly on the Web and exploitative, rude, arrogant actors were now exposed.
  • VC's with no strong voice/perspective on the web languished in obscurity wondering what had happened.
  • There was a power shift. More power shifted to the entrepreneur (although this was not the only reason for this dynamic).

Second Layer: SuperAngels Emerge

kopelman
kopelman
clavier
clavier
conway
conway
cenkut
cenkut
mike maples

mike maples

naval ravikant

Due to the inexorable advance of technology, the cost of launching companies was dropping precipitously during this time and entrepreneurs no longer needed large checks from VC's to get going. This paved the way for the emergence of the SuperAngel or MicroVC. These investors emerged in great contrast to traditional large funds. Founder-friendly, no board seats needed, easy terms with a "lets do this together mindset". Also, some respected law firms started using their websites to publish standard term sheet templates openly that the industry began to adopt. I see the highlights as follows:

  • With VC blogging platforms seeding the field, the precipitous drop in costs to launch companies opened-up a 'Second Layer'
  • A new breed of superangels/microVC's emerged: Kopelman, Clavier, Conway, Ravikant (again!), Senkut, Maples & others
  • The meme of founder-friendly investors (often entrepreneurs themselves) emerged, open discussions, open personalities, no board seats, friendly terms, convertible notes.
  • Law Firms start putting out "standard term sheet models" openly and deconstructed the terms to which entrepreneurs were so often oblivious

 

Third Layer: VC as Service-Provider,  the emergence of AngelList, Secondary Markets, Accelerators

kopelman
kopelman

naval ravikant

andreessen horowitz

andreessen horowitz

barry silbert

barry silbert

Even though some firms had been providing some of these services here and there in the past, First Round Capital and then Andreessen Horowitz took the concept of VC as service-provider to an entirely new level. Using software to streamline the networks of all their portfolio companies was a big start. One CEO could now get instant information about any given problem (s)he had by pinging the system. Andreessen then put this all on steroids by hiring pr/bus dev/finance and other professionals in-house to provide services to their portfolio companies. They have set a standard so far out ahead of anyone else in the field that their fund has become known as one of the best in the world despite having been in existence only for several years.

The JOBS Act has also now enabling true crowdfunding. AngelList (founded by names that should be sounding familiar by now: Ravikant and Babak) is at the forefront of this movement and has become preeminent as the place for early stage investors and entrepreneurs to go for an "online" solutions to raising money. AngelList's Syndicates have now been released which opens up fascinating possibilities. Prominent angels can already "raise" their own mini-venture funds on that platform within days. It's truly a huge shifting of a tectonic plate.

But it must be said- whereas now people are 'suspect' if they don't have an AngelList profile, a few years before this many people thought Naval Ravikant (the CEO) was spinning his wheels or worse. Many people didn't understand what he was talking about and couldn't imagine VC being done via a platform. He kept talking about the "unbundling" of the venture process: capital, advice, referrals, etc. He had already seen "the next layer" before most.

Lastly, in this third wave we saw the emergence of secondary platforms like SecondMarket and SharesPost, companies that emerged to provide liquidity to founders and early employees of companies that had reached escape velocity. I remember how alien this concept (and frankly unpopular in certain circles) seemed when Barry Silbert launched his company. Now these entities seem like long-time fixtures of the venture ecosystem.

Very recently I heard of a company called ExitRound that is attempting to create an anonymous marketplace for founders to discretely "explore acquisition opportunities", (read: acqui-hires). Some people are already questioning the validity of this approach- who's to know if they're right or wrong. There's no question this could become another viable micro-layer in this category.

 

Fourth Wave (yet to come): An algorithmic approach?

vinod khosla

vinod khosla

It's my view that the disruption of VC is still in its early innings. And this is an example of where I think we need to be most alert for new developments and opportunities when we look at any industry being re-invented. As an example, Vinod Khosla, tweeted the comment and link below the other day. He's talking about the early frontier of VC's adopting algorithms to help them make their investment decisions and gives several examples of emerging players in that space. His point is that this sort of data-enabled approach will be standard in the future whether people can stomach it now or not.

Vinod Khosla @vkhosla  11/3/13, 12:55 PM
VC in age of algorithms: if algo say's “yes” there’s human screening; VC's subject to a litany of cognitive biases

This is probably going to comprise yet another layer of disruption/innovation to what may or may not be called "venture capital" by then.

 

Very Speculative: Potential Fifth Wave: Investing in People's future earnings: Athletes, Entrepreneurs, Celebrities

vernon davis

vernon davis

Some entrepreneurs believe they are on the vanguard of creating a new asset class. Upstart and Pave are two players in the early innings of moving entirely beyond funding companies but going right to investing in people themselves. Fantex is another emerging company that allows you to invest in the future earnings of professional athletes. Vernon Davis, pictured above, has recently put 10% of his earnings up into such an investment pool.

I actually think this loan stuff  will get destroyed as well. I think that if this is to become a "wave" the cutting-edge stuff two years from now will be just funding people, mentoring them, getting them ultra-networked and sharing in their upside. If they can't pay you back- there will be no consequences. Here again algorithms will be used to identify the best people to back and there will be an ultra-elite layer of human curation on top of it all. I think I know the guy who will make this happen. I was in the same room with him discussing just this today.

 

Summary

So here is the inexorable advance of technology/software (designed by human innovators of course) doing its thing and running its course in VC. It's opening up and transforming a formerly closed industry. Old players that were taking advantage of entrepreneurs and relying for their livelihood on the information advantage are dying off. New players with 'next-gen' approaches have come-in and eaten up many of the older players. The AngelList platform is now on the cutting edge of what may well be the next wave of change. As mentioned, an investor without an AngelList profile has already become 'suspect' in the same way that a professional without a LinkedIN profile is suspect and perhaps irrelevant.

But to my point earlier- so what? If you are interested in VC or are an angel or VC yourself- or are an entrepreneur looking at this space- what can you derive from this understanding? Where are the "secrets" Thiel has described? Where do the opportunities lie? Where is the hidden knowledge/next opportunity of today and of tomorrow? How can entrepreneurs and investors "roll with this" instead of becoming irrelevant?

Here are some thoughts as to where to look for the Hidden Knowledge- the so-called secrets:

  • What are the best investors doing to reinvent themselves right now?
  • Who is generating the best process/manual for judging early stage investment prospects and how?
  • What will be the key to being able to form and build a great syndicate on AngelList? (Social Algorithms?) :)
  • How to identify the new breed of low-life  investor who uses these platforms? What's the new camouflage they wear?
  • On the other side- quality investors who didn't have a knack for social media and blogs but were good with entrepreneurs and added massive value are now obscured from view and can only be found through the old ways, ie. practitioners who respect them "bigging-them-up" and making warm intros to them. How to find and identify them?
  • I have speculated about two subsequent tech/software led waves (four and five above) that may further disrupt the VC industry. Where do you see it going?
  • Will there be a new breed of superangel that sucks up all the air in the room due to their huge social profiles? Will they emerge from AngelList Syndicates or elsewhere?
  • Will most funds get raised on AngelList in the future?
  • With SEC rules loosening how will this transform the fundraising landscape for funds?
  • As Thiel would put it, where are the remaining hard problems to solve in this space? Are convertible notes on their deathbed? What will the newer structures and instruments look like?

Let me know your thoughts.

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The Great Unbundling of the University

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This is the fourth post in my ongoing Series on Technology, Disruption (and chess). In my previous post we discussed what I called the Great Unbundling of Venture Capital and it led to a fascinating conversation on Twitter, in the comments, in personal conversations and on various blogs.  People have strong feelings about venture capital and the topic of its evolution, and unbundling definitely touched a nerve with many.

In this post, we'll examine the phenomenon of an ancient and venerable institution, the university, which is in the initial phases of its own disruption.

The "too long, didn't read version" of this post:

  • 4 of the 5 value propositions of the university *are* being and *will continue* to be disrupted/unbundled;  
  • we are in an immense bubble of 'education debt' that is unsustainable. Students will not, and cannot, afford to continue to burden themselves with crushing debt in the decades to come;
  • universities have evolved over the centuries into siloed institutions where inter-school/inter-departmental cooperation neither comes naturally or easily;
  • research and teaching (now coupled) will likely require unbundling over time;
  • the unstoppable force of entrepreneurship, as it pertains to schools, faculty, students, alumni and the curriculum, will be one of the major "tips of the spear" or "bunker busters" in leading this transformation; and
  • how universities acknowledge and adjust to the realities of #1 and #2 will determine their futures

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I've heard it said by many that the university has not changed its essential approach and structure for the last 1,000 years. Despite the evolutions of curriculum and despite many significant nuances and types of universities (about which entire books have been and will be written), I believe this to be in large part true. What I mean by this is that the iconic model- a professor standing before a room full of students and delivering her lecture as they scribble notes and ask questions- has been a constant for a millennium.

So, in keeping with our model of examining the phenomenon of unbundling and disruption in multiple industries, below is an 'unbundled list' of the various value propositions many Universities currently bring to the table. I'm using a slightly revised version of an excellent model that I believe was created by David Wiley:

VALUE PROPOSITIONS OF THE UNIVERSITY

1) teaching - content provisioning

2) research (exploration of knowledge and understanding for its own sake)

3) helping students w/ questions  (ie, office hours, master classes, review sessions, etc.)

4) camaraderie (exposure to like-minded people, a social life, networks, and alumni)  

5) issuing credentials (degrees that connote skills/achievement that historically have portended preferred access to jobs)

Together these represent a remarkable range of value and bring to mind the romanticized image of the idyllic university environment that is so much a part of our collective consciousness and culture. For those of us who were fortunate enough to have experienced it first-hand, it often brings some of the fondest memories of youth and can engender a great sense of loyalty to alma mater.

My own college, Williams, was founded in 1793, and the escutcheon reads: E liberalitate E Williams, Armigeri. It's a tiny college with 2,000 students total per year but the endowment is close to $2 billion. Why is this? It definitely has to do with the immense school spirit and loyalty the place engenders. We have #4 above (camaraderie) in droves.

Though I loved the experience of the classic, sprawling university and have devoted the last eight years of my professional life to another world-class institution, Columbia University, I hate to agree with the broad contention that it is no longer sustainable for *most* institutions to provide *all* of the above value propositions above "under one roof". Professor Clayton Christensen has pointed out that there are too many divergent business models at play here, and as a result, "in the absence of philanthropy, no university would survive". That's good news for institutions with world-renowned brands and huge endowments but is a huge wake-up call for most everyone else.

It's also well-established that we're in an immense bubble of 'education debt' that is similarly unsustainable, and it just seems inconceivable that students will continue to burden themselves with crushing debt in the decades to come. Check out this graph that Peter Thiel has shared in the past, comparing soaring student debt to a commensurate decline in median income. Simply devastating.

thielgraph
thielgraph

MY THESIS

Before diving further into the "University Stack" below,  my thesis is that:

1) it's widely accepted that the various value propositions of the university *are* being, and *will continue* to be, disrupted/unbundled;  

2) the unstoppable force of entrepreneurship as it pertains to schools, faculty, students, alumni and the curriculum, will be one of the major "tips of the spear" or "bunker busters" in leading this transformation; and

3) how universities acknowledge and adjust to the realities of #1 and #2 will determine their futures

So with this backdrop in mind, let's examine the five components of value Universities provide, (the "University Stack"), and how they are being disrupted in more detail:

THE UNIVERSITY "STACK" (unbundled)

1) Teaching- content provisioning:

Disruptive Force: Online Learning, MOOCs 

Online Learning:

It's interesting to note that Williams College was also the breeding ground of one of the first big-time efforts to deliver online learning. Professor Mark Taylor, (then a professor at Williams, now Chairman of the Religion Department at Columbia), had a vision for a global network of university online learning and raised $20+ million from Williams alum Herb Allen (of Allen & Co.) for the Global Education Network in 1999. It turns out that Taylor's vision, (which he elaborated upon years later), was a few years ahead of its time.

But his effort was far from the first. Check out the remarkable timeline just below or click on it to enlarge.

History of Distance & Online Education Infographic

Online learning is a game-changer that is radically transforming university education into what can only be described as what will be the "new incarnation of the University" in this century and beyond. The wealthiest, most established university brands will be just fine, but they too are already embracing the use of online-delivery of content at their own pace and in a manner to their own individual taste. MIT went "all-in" early on with 

MIT Open Courseware

 and others jumped in also with modified and hybrid approaches. As many others believe, I too think these attempts will evolve accordingly and that these renowned brands will endure.

It's "everyone else" that's been presented with an existential question: Why will students continue to pay or take loans for university degree from a less prestigious institution where there is a high likelihood of not being able to secure a well-paid job upon graduating? Unless these institutions embrace 'the online model' (and many are), they will eventually go the way of traditional print news organizations.

Thinking ahead, I believe the great story of online learning and MOOCs will ultimately be: access.  If you think about it, this is the ultimate disruptive force in this equation. Imagine a world in which people from all corners of the planet have access to education by accessing free online resources on every subject.  A much larger percentage of humanity's talent pool will eventually be tapped and the talent, creativity, ambition and industry of millions of talented people hungry for knowledge and access will be unleashed on the world. The great Universities, as well as a host of new institutions, will be at the forefront of this.

As Clay Shirkyput it not too long ago, "MOOCs expand the audience for education to people ill-served or completely shut out from the current system, in the same way phonographs expanded the audience for symphonies to people who couldn’t get to a concert hall, and PCs expanded the users of computing power to people who didn’t work in big companies."

There are so many amazing stories, (this one about Khadija Niazi of Lahore photograped below and this one about the young boy genius from Ulan Bator), about the 'unearthing of talent' in what have been the most "unexpected places". I believe that over time the inexorable advance of mobile/smartphone connectivity will drive the adoption of  MOOC-like courses and demonstrate that there is no such thing as an "unexpected place". These forces will unleash a much larger percentage of the world's total available talent.

Khadija Niazi
Khadija Niazi

2) Research (exploration of knowledge and understanding for its own sake):

Disruptive Force: Pressure from MOOCs, decline in gov't funding, entrepreneurship curriculum & need for adjunct professors, new startups that "open-up" a closed system & increase collaboration

For universities that are also research institutions, there is an enormous tension between the requirement that professors, who are seeking tenure, to both publish their research and concurrently serve as excellent teachers. The tenure system here is certainly at the core of this dynamic. Does a great researcher make a great teacher or vice-versa? We know this not to be necessarily true.

Like Christensen, I believe this too will be unbundled. Research and Teaching will eventually be split apart. In an increasingly competitive environment, given the advent of MOOCs on the one hand and the dearth of federal funding for research, the demands for excellence in each will be too great to keep the two forced together.

I think the need to increasingly rely on practitioners operating as adjuncts will also be transformative to the curriculum as well as the tenured ecosystem at universities.  As departments realize that information technology and entrepreneurship/applied learning is not only applicable but indispensable and core to all disciplines, this will result in the awareness that practitioners from outside academia will need to be recruited in greater numbers, and the whole edifice of tenure, hidebound curricula and the structure of departments will have to evolve accordingly. Think about it: what journalist, lawyer, physician or executive can succeed in the digital world in which we all live without an understanding of technology, entrepreneurial disruption and basic digital literacy?

Government Spigot Running Dry: another huge issue is that government funding for research is ebbing in a huge way. In the realm of applied research, this has led to a) a huge premium for research faculty and grad students "building things" in the lab to receive entrepreneurship education; and b) awareness of what it really takes to bring products to market via spinoff companies. This requires a sea change in attitudes and approach. It also requires a openness and liberalization of university IP policies. The good news is that some government agencies are getting smart and adopting Steve Blank's lean startup philosophy and offering faculty and graduate students training in the arena of commercialization.

Closed Environments:  new startups will over time "open-up" the often siloed environment of the university lab, and there will ultimately be less repetition/overlap and more collaboration/efficiencies introduced. As funding continues to be sparse, there will increasingly be a need for more openness.

3) Helping students w/ questions on the content  (includes office hours, master classes, review sessions, etc.):

Disruptive Force: the "flipped classroom", online student interaction, MOOCs, etc.

Here's an area that certain online learning companies are also trying to penetrate with local centers and peer-driven sessions. We also are seeing the adoption of the "flipped classroom" in many contexts, very notably in entrepreneurship classes/labs at universities. I also see entrepreneurship mentoring programs as a relatively new entrant into this arena. They can be incredibly effective and help students in all disciplines.

In short, increasingly we are seeing the blending and overlap of the university with its local ecosystem, more adjuncts, more mentorship programs, more flipped classroom settings. The transformation is gradually occurring.

4) Camaraderie (exposure to like-minded people, a social life, networks, and alumni):

Disruptive Force: Nothing Good Yet!

This is a piece that the traditional university has a great hold on. Here again, I think the established universities with large campuses, long histories and dedicated alumni bases add massive value that will not go away. Universities without this advantage will just be more vulnerable as online learning becomes firmly established. Yes, we are seeing the advent of great co-working environments of late- but it's hard to see these chip-away significantly at schools that have especially rich histories of community and school spirit.

5) Issuing credentials (degrees that connote skills/achievement that historically have portended preferred access to jobs): 

Disruptive Force: new breed of skill-based trade schools (GA, Flatiron School, etc), organizations seeking to create new kind of achievment/skill-based recognition (Coursera, YC, TechStars, 500 Startups and others), large corporations moving more heavily into training their own  

There are immense forces at work here that pose challenges to universities and colleges on many fronts and they are too numerous to catalogue in this limited space. Nonetheless, we see of late many trends arising such as the return to real-world "apprenticeships", to the sense of value (real or perceived) in certificates, (as in a Coursera certificate), and, (on the extremes), to the renegade appeal of the Thiel Fellowship whose cheeky tagline from Mark Twain reads: "I have never let my schooling interfere with my education".

Immense challenges and questions present themselves to the Academy. How, for example, will universities perceive and react to the market demand for digital literacy that new organizations like General Assembly and the Flatiron School have tapped into? Or, what does (and should) entrepreneurship education at the University look like in five years? On the entrepreneurship front, it is not uncommon to see students quit college with little hesitation if accepted by the likes of a YCombinator or TechStars, which are now harder to get into than most Ivy League institutions. I have listed other questions in the last section below.

Paul Graham, founder of YCombinator, penned this excellent piece on the steady evolution of the whole complex of academic/business credentials from their antiquated provenance of maintaining the status and power of wealthy families, to the unselfconscious protection of seniority, all the way to the rapidly emerging paradigm of measurement and performance. It's a must-read. He believes that the paradigm of "credentials" peaked in the late 20th century and we've entered a new era where skills, aptitude and talent can be and are measured and are the new currency. Of course he is right.

How American universities adapt to this reality and the market forces at play will be the story of their success or failure in the new century.

Summary/Next Layers/Open Questions

So to summarize- the university landscape looks like this:

  • it appears that 4 out of the 5 value propositions of the traditional university are moving swiftly towards disruption/transformation
  • we are in an immense bubble of 'education debt' that is unsustainable. Students will not, and cannot, afford to continue to burden themselves with crushing debt in the decades to come.
  • as Clay Christiansen has stated: "in the absence of philanthropy, no university would survive"
  • universities have evolved over the centuries into siloed institutions where inter-school/inter-departmental cooperation neither comes naturally or easily
  • research and teaching (now coupled) will likely require unbundling over time

So given this landscape as I stated in my last post about the unbundling of VC: so what? Well, if you are interested in the university space for any number of reasons, i.e. you are an alum, a prof, a student, or you are wondering what options your kids will have when the traditional time "for college" arrives, or you are an entrepreneur or investor in the .edu space, etc. below are some of the big questions you'll have to confront and consider.

And once again, I ask you: where is the "hidden knowledge" or "the secrets"  Thiel encourages us to look for?

As I mentioned above I believe one of the big secrets is this:

Entrepreneurship is leading to a great transformation of the academy, both from within and without.

The digital/information revolution is firmly upon us and the creative/entrepreneurial impulse is the ultimate silo-buster, cutting across all disciplines, affecting every fiber of institution and curriculum. The University has entered the era of Entrepreneurialism.

But what are the other secrets? If one postulated that the following aspects of a university are either subject to radical transformation or doomed, massive opportunities abound. Beside each please help me add to the lists of potential replacements and by all means add your own in the comments section.

  • Tenured Faculty vs. ??
  • Massive Tuitions vs. ??
  • Research Status Quo vs. ??
  • Government Funding vs. ??
  • Traditional Campus vs. ??
  • Camaraderie of Campus vs. ??
  • University/College Degrees vs. ??
  • Classroom Teaching vs. ??
  • University Libraries vs. ??
  • General Population Dorms vs. ??
  • Classrooms vs. ??
  • Closed Laboratories vs. ??
  • 3rd Year of Law School vs. ??
  • Keg Parties vs. ??  :)

Would love your thoughts and comments. Until next time...

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