The venture capital industry is all about helping companies scale.
Peter Thiel and Clarium helped Facebook grow from a $5 million company in 2004 to a $44 billion company today. Forget doubling or tripling. That’s growth of nearly one million percent, and they did it in under a decade. Helping small companies become staggeringly, mind-bogglingly, impossibly big is the industry’s core competency.
Why, then, can’t VC’s achieve this type of scale, themselves?
That’s the observation Dave McClure made a few months back in his blog post Scaling Venture Capital? We Suck. We Can Do Better (I know, that was 6 months ago, but better late than never). As a VC in the midst of scaling, OpenView spends a lot of time thinking about how we can do more stuff – complete more consulting projects, hire more people for our portfolio, make more investments, generate more content – without compromising the quality of our work.
The truth is that it’s very difficult, and we’re not alone in choosing the easy way out by choosing to grow our own firm in a much more controlled manner than we attempt to grow our portfolio. We’re not alone. No VC, to the best of my knowledge, has cracked the code to achieve Facebook-style one-million-percent growth. There are many in the billions of AUM, but none in the hundred billions. Why not?
The answer lies in the limitations of modern technology. It’s allowed some actions to scale infinitely while others are left in the stone ages.
To demonstrate what I mean, consider some of the things Facebook needs to do in order to grow so rapidly, that are only possible because of modern technology:
- Deliver its product on a massive scale. With computing power and storage dirt cheap, how much does it cost to maintain someone’s Facebook profile?
- Communicate instantaneously across the entire company. With a few key strokes, Mark Zuckerberg can let everyone at his company know exactly what he’s thinking and what they should be focusing on.
- Analyze huge amounts of incoming quantitative data. With terabytes of behavioral data being generated by its users, real-time analysis requires both sophisticated back and front-end systems.
Essentially, outgoing communications, technology, and quantitative analysis are incredibly easy to replicate. Since these are Facebook’s core functions, the company is able to scale at a positively ridonculous pace.
The problem is that venture capital’s core functions don’t really rely on those things.
Personal relationships and qualitatively-based decision making can’t be mass-produced by a computer. And while innovations like Twitter and Salesforce.com have certainly made a VC’s life easier, they haven’t been able to replace their core functions. Ironically, very few of the innovations that venture capital has fueled have actually made venture capital easier to do. That’s why no VC has yet succeeded at growing at a million percent.
Now there are business models that are threatening to disrupt the VC paradigm:
- Crowdfunding platforms are hailed by many as a more scalable alternative to VC. In my opinion, they’re liable to skimp on the main value proposition of a VC: qualitatively evaluating management teams (I’ve made my opinions on this topic very clear in the past, here and here).
- A few VC’s have launched with an explicitly quantitative value prop, such as Correlation Ventures. Knowing how difficult it is to scrounge up quantitative data on the companies we’re looking into, I have my doubts about this model. I’d love to be proven wrong.
These models are ambitious, and maybe someday we will see a VC grow one million percent. But until the new models are proven out, VC will remain a craft industry. We do suck at scaling, and no, we can’t do better.
Read more at http://www.business2community.com/facebook/facebook-grew-1-million-percent-why-cant-vcs-0294519#vrbwcbu6uVOAtd3i.99
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