Audrey Watters posted “Is Venture Capital Broken?” this weekend on ReadWriteWeb’s startup channel. The title is direct reference to an essay, titled “Venture Capital is Broken”, which angel investor Chris Sacca released as the “creed” of his new investment firm, Lowercase Capital.

Here’s Audrey’s excellent summary:

In it, Sacca observes that 10 years ago, it cost more than a million dollars for a tech business to launch, with steep hardware, software, office and internet costs, not to mention the “lavish parties so print media would write about their pipe dreams.”
Lowercase Capital’s Creed

But today, it is far easier and far less expensive for entrepreneurs to design, code and launch web services. But, Sacca writes, “many traditional VC funds have been loath to admit this reality and downsize their five hundred million dollar hauls. Why? They are paid fees based upon their total amount of money managed, thus there is no incentive for them to be smaller. Yet, as they try to inject those piles of money into early-stage companies, interests become misaligned and an inherent conflict between the investor and the founder often arises. Fund returns, the companies, the entrepreneurs and the users all suffer as a result.'”

This idea isn’t new. I wrote about it more than three years ago in “Cheaper and Easier” on my main blog. And it wasn’t my idea then; it was already out there. Here’s the description of a Web 2.0 session I attended in April of ’06:

The Dot Com Nuclear Winter is over, and funding for Web 2.0 startups has never been better. But traditional VCs are now being challenged by a variety of changes to the startup economy. Lower startup capital costs, alternate financing strategies by angels and entrepreneurs, and early takeouts by mergers and acquisitions–hungry platform companies like Yahoo!, Google and eBay have changed the way the game is being played by startups in the 21st century. So are later-stage VCs toast, or do they still have a relevant role in the startup economy? Who will be the new winners and losers on Sand Hill Road, and around the world?

To me that’s pretty much the same thing, just four years ago. Do you agree?

One interesting offshoot of that is, possibly, an apparent change in the focus of leading venture capital investment. I quote here from a press release of the National Venture Capital Association, from April of this year:

“Life sciences continues to be the No. 1 sector for VC investing, with biotechnology being the absolute single-industry leader in dollars invested over the past four quarters,” noted Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. “Venture capitalists continue to exhibit great confidence in the life sciences sector, as well as clean technology, as they outperformed all others in venture capital investing in the first quarter. VCs are upholding the belief that the prospects for liquidity are good in these areas, and we continue to see IPO filings for VC-backed companies in each of these sectors.”

Another possible effect is the similar change in entries to major MBA-level business plan competitions. This has less far-reaching impact, but it’s interesting to me. This is from one of my posts on this blog last month:

I’m seeing a trend emerging. Software and web applications, which is where my experience is, aren’t winning the competitions. Medical businesses won all three MBA venture competitions I was involved in this year, and finalists were mostly medical, natural, organic or clean energy. And a natural organic but basically low-tech product won our angel investment.

What do you think? Could these all be related facts?

Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.