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.