How the cloud changed venture capitalism
– Mark Suster is a former serial entrepreneur and a partner at Los Angeles-based venture capital firm GRP Partners. This article originally appeared on Suster’s blog “Both Sides of the Table”. The views expressed are his own. –
In this three-part series I will explore the ways that the venture capital industry has changed over the past five years that I would argue are a direct result of changes in the software industry, not the other way around. Specifically, Amazon has changed our entire industry in profound ways often not attributed strongly enough to them.
I believe the changes to the industry will be lasting rather than temporal change. Venture capital is in the process of its own creative destruction with new market entrants and new models of innovation at the precise moment that our industry itself is contracting.
I will argue that when the dust settles, although we will have fewer firms, each type will end up more focused on traditional stage segments that cater to the core competencies of that firm. The trend of funding anything from the first $25,000 to funding $50 million at a billion-plus valuation is unlikely to last as the skills and style to be effective at all stages are diverse enough to warrant focus.
I will argue that LPs who invest in VC funds will also need to adjust a bit as well.
Rewind
When I built my first company in 1999 it cost $2.5 million in infrastructure just to get started and another $2.5 million in team costs to code, launch, manage, market and sell our software. So it’s not surprising that typical “A rounds” of venture capital were $5 to $10 million. We had to buy Oracle database licenses, UNIX servers, a Sun Solaris operating system, Web servers, load balancers, EMC storage, disk mirrors for redundancy and had to commit to a year-long hosting agreement at places such as Exodus.
Hot Prospects: Phin Barnes, First Round Capital
– The following profile is an abbreviated version of Venture Capital Journal contributor Tom Stein’s piece for the the VCJ’s series on “Hot Prospects” within the venture capital industry. –
Phin Barnes’ first entrepreneurial endeavor did not exactly go according to plan.
In 2003, the former college basketball player co-founded ResponDesign, a developer of fitness games for consoles like the Xbox and Play Station 2. With its first game, Yourself!Fitness – which was based on Barnes’ concept of a “virtual personal trainer on a game console” – the company blazed trail for a whole new category of fitness games, including the wildly popular Wii Fit.
Barnes gained valuable experience as ResponDesign’s chief marketing officer, establishing marketing partnerships with a host of major companies, including Best Buy, McDonald’s, Microsoft, Nike, Proctor & Gamble and Sony, he says.
But by 2006, he had soured on the Portland, Ore.-based company after he and CEO Ted Spooner disagreed on direction. Jaded, Barnes left ResponDesign, which continues to operate as a private company. Today, Barnes wishes ResponDesign had raised venture capital, so he could have gotten the business advice he lacked at age 27.
The experience with ResponDesign motivated Barnes to become a VC. “It made me realize that if I had a reputable investor and the right kind of guidance, the company would have turned out completely different,” he said. “I want to help entrepreneurs avoid the same mistakes I made.”
