The Zero Billion Dollar Fund

We have this saying around our firm, the "zero billion dollar business".  It describes a business, like Craigslist or Digg, that enters a market, like classifieds or news, and by virtue of the amazing efficiency of its operation can rely on a fraction of the revenue that the market leaders need to operate profitably.  These zero billion dollar businesses are highly disruptive and change the economics of their industries over time.

Well Bill Burnham (not be be confused with my partner Brad Burnham) hints at something similar in this well written post about the challenges facing the venture capital industry.  We may be looking at the zero billion fund someday soon.  In fact, the time may be coming sooner than any of us know.

Union Square Ventures was designed as a "zero billion fund" in a sense.  Both Brad and I had come from firms managing around a half a billion dollars and we felt something much smaller was necessary in the new environment. We figured $100 million was a reasonable size, we ultimately raised $125 million, and I think it is a very good size in this environment.

But we are also witnessing the rise of the angels and "super angels" like Mark Cuban and Pierre Omidyar who can act like angels but have the balance sheets of VC funds.  And we are seeing VC veterans like Alan Patricof and Vinod Khosla strike out on their own, presumably managing mostly their own capital.  Again, the rise of the super angel or micro VC.  It's basically the same thing when it comes to pros like Alan or Vinod.

I don't think VCs need to worry about the demise of the venture capital business however. There will always be a business supplying risk capital and "advice capital" and "connection capital" and even "human capital" to startups.  However, the supply and demand dynamics are in flux, at least in the technology business, and its important to right size your capital under management to be sure you are operating in the sweet spot of the market.

Comments

[Shannon Clark]

A serious question - if many of the new companies today are requiring less capital and (in most cases) generating much smaller revenue streams than in the past - where is all the resources previously spent (spent, not invested) into the tech sector and other emerging companies going?

Are companies simply retaining it as additional profit?

Spending it on sectors where costs are rising (health insurance, legal costs, compliance efforts relating to Sarbanes-Oxley etc.) ?

Shifing a growing percentage of their dollars into fewer and fewer firms (IBM, Microsoft, Oracle, SAP, perhaps a number of big services firms?)

On the consumer side - has money just moved around from telcom spending at home to telcom spending on cell phones? On broadband access? On Cable TV? etc - or is it increasingly the case that entertainment and "gadget" dollars on mostly flowing to a relatively small number of pre-established companies (Apple, etc)

I've recently moved to Silicon Valley from Chicago. I'm helping co-host a monthly networking event for Web Innovators in San Francisco (SFWIN - google for the wiki page to register, next event March 23rd at Microsoft's offices) - at these events I've met a large number of "web 2.0" startups - many of whom are building pretty "cool" and engaging applications - but for the most they are focused on consumers and are nice-to-have efforts - not critical components to an ongoing value chain.

[when I'm not organizing conferences like MeshForum (May 7-9 in the Bay Area) and other events - I'm also writing a book on Economics as a Network - so I'm very interested in where all the resources previously flowing into the tech and general "startup" sectors are now flowing and/or will be flowing in the future]

Great topic (as usual)

Shannon

[AWilhem]

In Europe we've seen the development of something similar - I'll call "Local VC", for want of a better title (feel free to coin a phrase).

They are private entities that act like development funds (in that they only invest locally), have a small investment pool (under 100 million), and usually are run by a small group of angels.