"Is VC Past Its Prime?" or "Five Things I learned at the MIT VC Conference"

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The keynote speaker at the MIT VC Conference, Alan Patricof of Greycroft Partners, was clear:  venture capital funds are getting 'inappropriately' large and change is coming.  Mr. Patricof is a legendary pioneer in the VC world (but note: while he is fine with being termed a "generational figure", compare him to Bono or Sting but never Tony Bennett), but the current market is not sustainable.  Because of the investment metrics and their need for certain returns, LPs writing larger checks means that VCs are forced to make larger investments into companies that don't need that much money.  The prevailing winds in the VC industry are heading toward capital efficiency and VC2.0, which he summed up as: "small is beautiful".  VCs, said Patricof, need smaller, more targeted investing; smaller funds will find the most success in this economy. Overall, the MIT VC Conference was, in my view, a big success.  MIT always does a great job bringing together talented and accomplished speakers and attendees to advance learning.  And it is always good to reconnect with friends in the industry as well as new many new faces.  While I could go on at some length about the information presented at the conference, here are a few points that I thought were valuable:

  1. Capital Efficiency is Key.  As Alan Patricof noted in the keynote, which was echoed by several of the presenters, the trend of ever increasing VC funds is not sustainable.  Oversized funds investing $20-50MM in companies will become the exception rather than the trend.  The current economic environment will force VCs to focus on targeting their investments and using more discipline.  That could be good news for early stage companies.  I will note that not all of the VCs on the panels agreed that funds are too large.  Some argued that they invest their funds in different ways, or have founded new efforts like Dogpatch Labs or Start@Spark to bring seed capital to startups, but nonetheless did agree that the market is applying new pressures on VCs.
  2. Will This Bring New Relief to the Funding Gap? The effect of this pressure on VCs in relation to angel investors was touched upon at the conference, but will likely be looked at in more detail as the market develops.  As VC funds increased in size over the past few years and angel investors increasingly formed angel groups to invest larger amounts, a capital gap increased for early stage companies struggling to locate seed funding.  If VCs retreat to smaller funds, angel groups may have to do the same, which may alleviate the situation and provide much needed seed capital to entrepreneurs.
  3. Entrepreneurs Need to Focus on the Problem.  More discipline in the VC market means that entrepreneurs will need to be ready.  As Rich Wong of Accel Partners noted, it is not enough to pitch the next best thing as a solution - VCs need more than just a cool app.  To paraphrase, "entrepreneurs need to spend more time on articulating the problem rather than just pitching the solution".  If you are not focused on solving a problem, your solution will come up short.  True.
  4. Mobile Hardware Doesn't Matter.  An interesting discussion about the future of mobile devices showed that in the greater scheme of things, mobile hardware design is not the future - unless of course it solves a new problem.  Humphrey Chen of Verizon noted that it has 66 mobile devices in its catalog, each of which is pretty similar in functionality in relation to its competitors.  But that means there are 66 different ways for which developers have to design solutions.  That is not sustainable.  As mobile communications develop and people begin to move more services into the cloud, your mobile device will not matter as much.  It is the software that will drive innovation.  But even there, where apps are currently selling for an average price of $2.78, innovation is needed to propel the industry forward.  John Backus of New Atlantic Ventures noted that the current "chaos in the mobile market is a great fertile opportunity for entrepreneurs".
  5. Be Bold, Fail Fast.  ChaCha CEO Scott Jones presented important tips for entrepreneurs to remember: you have to be bold in your vision and be sure to fail fast.  Don't be afraid to try new things.  If they don't work, stop doing them.  But also be willing to come back to them later - maybe it was the timing that wasn't right.  The key is that entrepreneurs need to be focused on solving problems and taking risks to provide the right solutions.
  6. Oh, and Hubspot can really throw a party.  Thanks Brian and Dharmesh!

What do you think?  Is venture capital working for entrepreneurs?  Can something new provide a better solution?