The VC industry in Silicon Valley is entrenched in the past. Hell, even the name, "Silicon Valley" is a throwback. How much bonafide silicon fabrication takes place there vs. Taiwan now?
VCs want to hit a home run, e.g., "the next Google" but as the software industry has continued to mature, consolidation is what has been happening more than the creation of new large companies.
Maturity can lead to commoditization which Nicholas Carr wrote about it with his "Why IT Doesn't Matter":
http://www.nicholasgcarr.com/articles/matter.html
And that was years ago. Since then we've seen Sun Microsystems has fallen by the wayside (a member of the old guard passing).
Once there were dozens of automotive companies in the US, they ultimately consolidated to the big three we know of in Detroit. Going back to the 19th century, railroads were "the next big thing".
What the software industry has going for it is that it is a bit more dynamic than industries that require massive infusions of capital for physical materials since software is only an abstraction after all.
Back before the World Wide Web took off there was a consistent theme of "What's the next killer app?" among tech journalists. Their frame of reference was Lotus 1-2-3 sold IBM's PC, Aldus' PageMaker sold Macintoshes so therefore "what's next?"
The World Wide Web is an artifact of many technologies and its effect on society has been the "next killer app". At this point, we're going to see a continued evolution of this platform. I would say the next great leap on the Internet will be because of increasing bandwidth, i.e. a company born as a side affect of the web. Like it or not, TV in 20 years isn't likely to look like TV today. So if a company can shimy itself in that switch, there's a potentially huge upside. But this isn't news, Google is very aware of the possibilities (which is why it is working on Google TV).
My point being that it will be a while before we see another Google or Microsoft but more specifically there needs to be another paradigm shift before before VCs see an exponential gain with their investments within the software space. Shifts can happen, e.g., Apple managed to shake up the phone industry. A bit of serrendipidity and someone with tremendous vision (Steve Jobs) fueled that, however Apple is an established and its recent success has nothing to do with VCs.
So if the software industry isn't going to be exciting for the foreseeable, that is, it won't support dozens of VC firms, what's next?
This leaves ventures that require more hard science - biotech, energy, etc. Only problem is, those industries require much higher levels of capital investment over a longer period of time for something to come to fruition. A notion that the spoiled (from software) VC people aren't likely to be keen on.
Just my 2 cents,
-M
By Georges van Hoegaerden, Managing Director, The Venture Company, is a long time critic of Silicon Valley’s VC industry.
Mr. van Hoegaerden was born in The Netherlands and came to Silicon Valley to work at Oracle. He soon jumped head first into the startup life. But he quickly became disillusioned with VCs and a VC industry that lacks proper governance and consistent execution.
In a recent post: Saving Silicon Valley, he warns that the VC industry is facing an “implosion” because the VC returns are terrible, and sooner or later, the investors, the Limited Partners won’t continue investing in funds that have mediocre returns.
“The startling revelation, as proven out by the empirical evidence I have delivered for quite some time now is that according to a renowned money manager 95% of Venture Capital (VC) firms are not making any consistent money for their investors (Limited Partners).
And that means Silicon Valley is at the brink of a serious implosion.
Imagine what would happen if only about 35 of 790 VC firms were to survive in ten years from now.”
There is no reason why this should be the case. He points out that:
“With 80% of the world’s population still not having access to meaningful technology applications, the opportunity to spawn new groundbreaking innovations remains enormous.
Technology adoption keeps growing, even when Venture Capital declines in its ability to govern worthy innovation. So, the opportunity dictates that there is much more room for Venture Capital firms to grow, just not for ones that cannot establish a proper investment thesis of innovation.
There is no valid reason why 100 VC firms with a single $100M fund cannot generate a six times return each, except for the improper deployment of risk. Certainly the gaping opportunity in technology dictates that there is also no reason why the total number of Venture firms in the U.S. could not reach 1,000.”
But the VC industry is contracting not growing.
“A speaker at a recent conference claimed the demise in VC firms to be as large as 30% over the last 10 years, with as much as 50% of venture folks already affected. New Limited Partners to the sector I speak with simply see no reason for getting in, given its deplorable performance.”
What can be done?
“Our government has simply not connected the dots between systemic failure in Venture and systemic failures in the economy, just yet. The pain and destruction probably has to become more obvious first. ”
The cost of doing nothing is the US will lose its leadership position in innovation and it will be much poorer because of that loss. Innovation creates jobs and jobs are essential for a healthy society.
But changing the VC industry is a tall order and apart from a small handful of people such as Mr. van Hoegaerden, there isn’t much appetite for change among the VCs.
