There Are Two Venture Capital Industries

I attended a breakfast meeting the other day where David Silverman of PWC presented the latest Money Tree data on the venture capital business to a room full of entrepreneurs and VCs.

As I sat there and listened and read the charts, it occurred to me that there are now two distinct and very different venture capital businesses.

The first VC industry is investing in software based businesses. The software VC business has been fundamentally altered by the massive decrease in the cost of building and launching a software based business. I don't think I need to explain why this massive decrease in cost has happened to this audience. We've talked about that ad naseum here and on other tech blogs.

The second VC industry is investing in cleantech, biotech and other capital intensive tech businesses that have economic models that have not been fundamentally altered. This VC industry operates largely the same way it has operated for the past twenty or thirty years.

I've asked David to help me put together some numbers that will show this breakup of the venture capital business. I hope to get the numbers in the next few days and will be posting them and some additional thoughts on this topic in the coming weeks.

I don't think you can make blanket statements about the VC business anymore. These two industries are very different from each other and will have very different business dynamics and risk and return characteristics going forward.

#VC & Technology

Comments (Archived):

  1. Hank Williams

    Interesting. This has been intuitively obvious, but I dont think I’ve heard anyone say it out loud yet.It seems to me that because of the dearth of IPOs, that that the non-software side of the business is in mortal danger, and I wonder what it means if the rate of more fundamental technology development is left to incumbent companies that have significant (but shrinking) R & D budgets. The world can’t be totally dependent on Intel, IBM, and a few other mega companies to carry the ball. I agree with Judy Estrin’s assessment (http://www.theinnovationgap… of rapidly declining state of hard tech R & D and its pretty scary stuff. Perhaps we can just leave that to China :(.

    1. ZiWeb

      yeah but I don’t think China really innovates, they just produce.

      1. Rick Bullotta

        That’s a myth. There is plenty of innovation occurring in China and elsewhere, whether it be in cleantech, production processes/scale, material science, or healthcare.While the US may not seem to have the governmental R&D funding of the EU and of somewhere like China, our private investment process can have a positive “darwinian” effect of making the net R&D more focused and with a higher probability of success. However, we do need to come up with a creative way (through grants/tax incentives/other assistance) of collectively underwriting some of the longer term and more ambitious R&D.

        1. JLM

          This type of competition is never the average v the average.It is only the top 1% v the top 1%.This is why American exceptionalism — only in the context of this discussion, mind you — is so damn important.We have to have the best top 1% not the top average.

      2. nakisnakis

        This is changing with China moving into a more assertive position in terms of in-house innovation. What’s exciting about China getting into clean tech, etc., is the potential to leap-frog outdated systems and structures.Here are two relevant NY Times articles:-> “Paying for Innovation” by CATHERINE RAMPELL – http://economix.blogs.nytim…-> Blog post on “NY Times: China Leads in Smart-Grid Investment” –…It would be great to explore collaborations and synergies between the two venture capital industries to find ways to leverage the cheaper software-based investments to make strides in the more capital intensive tech businesses. For example, through more effective simulations.

    2. Rick Bullotta

      Totally agree with your assessment, Hank. It keeps me awake at night, for sure…

  2. LIAD

    if I was a VC – I know which of the industries I’d rather be in.

  3. Dan Ramsden

    I wonder, is it that there is now a split, or was there always that difference but we now pay closer attention (because the business is being scrutinized more carefully)?Separate issue: I never understood venture investing cohabitating with high-capex and long lead-time projects, especially nowadays, when the landscape changes so fast. I always thought those should be funded by strategics, or by NASA or something. But obviously I’m in the minority. Any thoughts about which of the two VC classes is seeing more capital inflow? Or is that the subject of the follow-up post? Thanks.

    1. fredwilson

      the PWC Money Tree report shows that in recent quarters, way more money hasbeen going into biotech and cleantech but way more deals are being done insoftware based businessesthose are the numbers i want to collect, graph, and share with all of you

      1. Dan Ramsden

        Interesting. LPs have to allocate $ en masse, but hard for VCs to pull trigger? Anyway, look forward to the follow-up post. Thanks again.

      2. adamianm

        I attended that event as well and can’t agree more on the view of the “two industries”. Looking at the numbers presented by PWC in NYC region only, roughly $28MM out of $40MM that funded seed/early stage deals went to 2 (!!!) biotech companies. Lumping all this information together might be misleading. Hence, presentations have to show break out by sectors as well. Of course, we can further subdivide Biotech, Medical Devices and Healthcare IT based on their respective capital requirements and time to exit with biotech being the most expensive, time consuming and having the highest failure rate…However, venture approaches to life sciences industry are also being rethought in terms of required milestones, time and valuation expectations for exits. But.. regardless of what VC industry we are in, our primary responsibility is still to return money to LPs. So, let’s get more analytical and creative here.

      3. Eze

        Hi Fred,Do you think it makes sense to look at the VC industry in aggregate though? It seems to me that on average, returns are close to 0 or even negative, yet some funds/angels are turning a lot of profits…How can you get the ‘winners’ out of these numbers?eze

        1. fredwilson

          that is exactly why i wrote this postyou can’t look at in the aggregate

      4. ZiWeb

        I’m assuming the reason more money goes into biotech and cleantech is because of the heavy expenses. It would be interesting if you could include the expenses particular to each industry (such as machinery, research equipment, etc…) as well. It would help put it into perspective.

      5. VCE

        You may want to take a look at the trends in deal terms between the two industries. Not only can you see 13 specific deal terms per deal, but also how often the particular term is used in the Valuation & Deal Terms database at Which coast you are on can also play a factor, based on the data that we have gathered and make available. Keep in mind, the data that we make available is from regulatory filings, both state and fed filings.

      6. JLM

        Fewer big $$$ deals v more little $$$ deals.In a certain way, that suggests that the 1/3 x 3 approach is going to work very well for the software clan as their big winners will be balanced by a lot of smaller losers, if they remember to turn off the tap.

        1. fredwilson

          yup, exactly

      7. Anand Sanwal

        Fred – Just sent you some data breaking down the two venture capital industries into what I think you were looking for. Let me know if there is any other segmentation/data that would be helpful.We also posted the graphs/data here:…Best,AnandCB Insights

        1. fredwilson

          anandi want to cut the numbers a bit differentlyi will post my charts soon

  4. Bala

    I am not sure if I agree with the heuristic, I don’t think we can pigeon hole VC into buckets… that is in my humble opinion the problem. Rather than trying to say which camp I belong to it would make sense for VCs to focus on what problems need to be solved and the value to be created. I think there are many hard problems to solve in software, internet etc and the same is true in Biotech, cleantech etc All of these need investments and I don’t think China or India is going to solve any of these problem… they have their own agenda. I think the VC world is ripe for some new ways to think and approach problems. I have always viewed that if VCs start to think about the problems Entrepreneurs face then there is scope for a relationship, value creation and investment. Fred aside, many successful VCs are successful entrepreneurs turned VCs.This is what I have been doing and surprisingly or not surprisingly, it seems to make a difference in the Entrepreneur’s world.

  5. Carl Rahn Griffith

    And the 2 industries will have rather different Exit strategies?

    1. fredwilson

      maybeacquisitions will work in both sectors but it will take longer to get their in the capital intensive sector

  6. Peter Brünings-Hansen

    With a background in cleantech cluster studies I have only recently started looking into the broader VC sector, so obviously a novice on this site.Nevertheless, from et CT perspective Fred’s insight makes alot of sense. is also positioning itself based on that “reality” and alot of data on the CT VC sector is available through their site.Look forward to following the theme here and would be interesting to hear Fred’s view and see how the “crowd” synthesizes the seperation of the two VC industries i.e. how do the basic premises for funding differ, time to market and chasm considerations, etc.It seems as if one distinction could be that CT ventures generally are experiencing longer and more expensive times to market, while the software oriented ventures are going in the opposite direction?CT ventures in Denmark at least face a huge challenge in attracting the necessary funding just to get proof of concept. Development times are long and often totally dependent on government funding & university support. then when they finally hit the market they still have to compete against the incumbent, well-developed and powerful lobby of “Dirty tech” introducing even more uncertainty and dependence on government stimulation.I guess this is also what Dan is saying in his comment on that funding CT ventures normally would be a job for Nasa and Corporate ventures. But should it be so in the future?Would love to hear all your thoughts on this – it is a huge challenge also to clusters and politicians these days…

  7. RichardF

    There will always be (just as there always have been) really capital intensive industries with longer development times that require big investment but some of the other industries are starting to see cost reductions to start up In biotech there has been a big increase in the use of technology to try reduce the cost of failure i.e. discover at the earliest stage possible whether a project will be successful or not. There are some similarities at the moment with exit strategies, the IPO market remains pretty slow and in the same way that the GOOG and Yahoo have been buying tech companies to fill gaps in their product portfolios big pharma will increasingly look to smaller biotech companies to fill their development pipelines.I’m sure you were pleased to see a year on year rise in the number of deals in the NY Metro area.

    1. Evan

      i’d think that drugmakers will always be pretty capital-intensive because of regulatory processes. that might actually be good from a VC perspective because the regulatory risk hinders the growth of potential investors, thus making it an investor’s market.

      1. RichardF

        it’d be nice if you could disrupt the costs at the Clinical end for sure!

        1. Andrew Greene

          Open innovation would distribute the risks (and rewards).

          1. Matt A. Myers

            In what sense? For the business or for society?

      2. adamianm

        There are quite a few examples of life sciences companies that cleared their regulatory hurdle and still ended up nowhere b/c of the reimbursement, technology adoption and poor marketing strategy. Investing in life sciences is way too “multifactorial” than in software in general. Though, none of it is simple.

      3. Rick Bullotta

        It’s not necessarily true that drugmakers will be or are “capital intensive”. While the R&D process can be costly, the growth in contract manufacturing has definitely changed the game. Small biotech startups can take a product to approval and have the choice of either selling to a larger pharma company with production and distribution scale, doing contract manufacturing and/or selling distribution rights, or building their own mfg/distribution capabilities.

        1. Dave Pinsen

          A good friend of mine has been a research scientist in bio-pharma for about a decade and a half. He offered his thoughts on the state of the industry in general in a guest blog post this week, if you’d like to check it out, “A research scientist’s take on bio-pharma”.

        2. Dave

          @Rick Have you worked with biotechs? Developing the drugs and running through a complex regulatory approval process is a multi-year, hugely expensive process. The investments required to fund many/most software companies to profitability would not even register in the biotech world. Contract manufacturing has helped with the costs of actually making the drugs, which is nice, but not anything else.

          1. Rick Bullotta

            Yes, Dave, I have (25+ years in manufacturing) and friends running biotech companies. I indicated that the R&D process was very costly, which it most certainly is – no disputes there. My point was that there is a middle ground taking shape whereby some biotechs focus on different stages of the product lifecycle and need not be prepared to build factories, sales forces, marketing/advertising teams and the like when and if their products make it through the approval cycle. Interestingly, this is an area where China and others with fewer regulatory hurdles may have a significant time-to-market advantage. It’s an interesting dilemma in an expanded global life sciences marketplace – how does one manage the tradeoff of risk to the public versus remaining competitive in a scenario where there are non-uniform regulations throughout the world? Similar challenge in eco policy/energy policy as well.

        3. Gorilla44

          A small company would still need $50M+ to do that.Outsourcing cuts some costs, but those costs are still high.(I’ve seen both ways close up.)

    2. fredwilson

      there are two blog posts i am working on based on the Money Tree dataone is this “two VC industries” memethe other is the “NYC has arrived as a software startup hub”

  8. Senith @ finance tutor

    IMHO the are both investing business and may have different properties/characteristics. But these differences are no more than the differences found in investing in health care companies vs. investing in consumer durables.

  9. Mat Evans

    I think instead of there being two seperate sections, it’s more like there is a main section of companies that require capital to start and develop their business which can and cannot include software. The other section of this is more like a pre-game area. Small startups that can move into the mainstream when the time comes.I say this because of the areas that a fast growing startup can suddenly find itself looking at. Facebook and Twitter are good examples – easily built, but due to massive uptake suddenly have to start looking at things like building datacentres – something that instantly moves them into the main arena.So a VC looking at a Biotech startup could also be looking at a software company that although might have had a cheap startup cost, the sudden running costs involved in success bracket in the same intensive capital need as the Biotech that needs to build a small lab to get off the ground.

    1. Harry DeMott

      Success based capital – as opposed to capital necessary for success.

      1. Mat Evans

        Yes indeed. A very good way of putting it.

    2. fredwilson

      there is a big differencethe capital software driven efficient companies that need big capital need it because they have broken out. they can and do raise those funds at big valuations.that is not true in biotech and cleantech

      1. Mat Evans

        yeah i completely see that.But is a software company at that point in time not in the same position? I suppose this is a bit too specific but if you imagine a software company that has grown quickly in terms of the resources it needs per customer. It might not have many customers but needs large capital input to increase its ability to serve new customers.You could argue that with such a low customer count it has not yet shown that it’s going to be successful and therefore is in the same place as a biotech or cleantech company.I’m probably thinking about it in a way too specific way, still learning 🙂

  10. Harry DeMott

    There are two AmericasIn one America – people are investing in solar, investing in battery technology, investing in geothermal converts, and electric cars. they are creating jobs, opening up new frontiers for industry – and are massively subsidized by the governmentIn the other America, people are figuring out better ways to meet at bars, fill the emptiness in their lives by farming electronic patches of dirt, remove their super egos by lifstreaming, destroying jobs due to efficiencies and are routinely banned by governments for promoting openness.Satire obviously – but the profiles could not be any different. One is capital intensive and has a time frame that matches well with the VC’s funds; i.e. it is long tailed, and has very high barriers to entry. The other is short cycle, capital light, with very low barriers to entry. Strangely, both can provide outsized returns if they work – so I for one would rather play in the business where I can take many more swings of the bat – cutting off failure much more quickly without dealing with a massive sunk cost problem – and pushing winners hard.

    1. Rick Bullotta

      Satire not. The slow (or not so slow) drift towards Idiocracy has begun.

      1. Jason M. Klug

        It can seem that way (drift toward idiocracy), but give this book by Steven Johnson a read:…Today’s subject matter might seem more trivial, but our interactions with media (from seemingly mundane check-ins, to reality TV, to video games) have become much more complex over the past half-decade, and they better prepares individuals for actual complexities in society (vs. the uber-simplified versions offered up in the past).What might seem like a dumbing-down of society is, Johnson argues, accompanied by a less-noticed “sleeper curve” of increased tolerance for complexity and ambiguity.I’m doing a poor job of representing the ideas in the book, but it’s a really good read. Thought provoking.

        1. Jason M. Klug

          [Noticed my typo… don’t let that dampen the argument against the drift to idiocracy ; ) ]

      1. Harry DeMott

        Hey – that’s my blog!Must be why I have similar stuff on the mind from day to day!

        1. Mark Essel

          Found it, read a quick post, commented, and subscribed.Woohoo, didn’t know you blogged. I’m like a caveman when it comes to finding regular commenters here who have wonderful blogs.

          1. fredwilson

            Harry is a diamond in the rough

      2. Mark Essel

        Thanks Evan, big time. I had failed to recognize Harry blogged.

    2. Aviah Laor

      and global markets impact?

      1. Harry DeMott

        that’s a good question.To keep in Fred’s portfolio – companies like twitter and foursquare increase communication and decrease friction – and so around the world these are pretty powerful forces – perhaps more powerful than in the US – where information has been pretty free for along time.Biotech companies, solar, etc… have the ability to change whole continents if developed well and deployed – so ultimately they have more impact – with far less chance of ultimately making it.

    3. fredwilson

      not just filling the emptiness in their lives, also replacing expensive entertainment like movies and videogames they can’t afford

  11. kagilandam

    Yes there are two different VCs for two different strategies.i) Make the product and then get the customer ii) Get the customer and then make the productand there are factors such asi) science which plays a major role in one and subtle in another.ii) safety which plays a major role in one and who cares.iii) Bill-of-material and downloadiv) yield and bugs known for yearsv) gestation period of 3-4 years and gestation period of 3-4 availability of raw material and outsourcing (insourcing, cheapsourcing, dead-cheapsourcing)vii) mix of many technologies and sole technologyviii) man power for vii) and unlimited.ok i will stop there … am i jealous of software?

  12. William Mougayar

    Do you think that a VC firm can be successful operating in both segments with same fund ?

    1. baba12

      I am not a VC but I doubt that a VC firm can be successful in both segments in most cases.There maybe a few exceptions to the rule like Kleiner Perkins. But generally speaking the risk to reward ratio is significantly different.I believe that without the support of the government in todays landscape investing in clean-tech, bio sciences and sustainable transportation industries is not a viable environment.VC’s can and will invest only when they feel that the risks have been minimized, it is in the DNA of a VC to be risk averse and for that reason alone the heavy lifting has to be done by the government.A public private partnership in these areas is the way to better manage the outcomes.

      1. Guest

        I believe KP raises separate funds for each area that they focus on. Also, their partners have their own areas of expertise. It could easily split into a couple of VC firms – one for IT, one for clean tech, and one for bio.

    2. JLM

      “Can” and “should” — two different questions.The longer I am in business, the more I respect the maxim — stick to what you know.The level of expertise that can be created by a focused concentration, is the difference between good and great.

      1. William Mougayar

        I agree but I am seeing mid size VCs being opportunistic about cleantech.Focus is always good of course, but there are several generalist VCs, so the question is- in as much as the demand side of the market is split in 2 clear segments, are the VCs themselves as clearly split or not?

        1. fredwilson

          i don’t think generalist is a good VC strategy

      2. fredwilson

        that’s my mantra JLM “stick to what you know”

    3. Guest


  13. akharris

    Thought it was a really interesting discussion overall. I was especially liked your comment about the influence of SWFs on VC funds and investments and I’d love to hear more about it.I put down some of my thoughts on the matter here ( which made a run at the hackernews top 10 yesterday.

    1. fredwilson

      i just checked out your post and left a comment on itthat was my favorite moment of the talk but i think it was lost on many of the people there

      1. akharris

        the topic switched immediately after you said it. it totally left me hanging.

  14. terrycojones

    “I don’t think you can make blanket statements about the VC business anymore.””There Are Two Venture Capital Industries”:-)

    1. Evan

      the only way to defeat the narrative fallacy is with a narrative. 😉

    2. fredwilson


  15. Rick Bullotta

    Fred, I think it is a bit tragic, however, that many of these “software businesses” that are being funded are so focused on some rather vacuous value propositions, mostly in the areas of entertainment/media, advertisting, and the like. It will be a great loss if our country’s best and brightest software talent is chasing these relatively shallow (and largely regional) objectives and quick flips rather than applying their skills to bigger goals. The loftier/longer-term challenges that the “capital intensive” industries are pursuing are the ones that create *real* value and will enhance our global competitiveness, create jobs, and improve the lives of people.

    1. Guillermo Ramos Peralta

      a) Creating real value is about solving real problems and making this world a bit better. Both VC industries add value.b) should US doesn´t solve the “soft” problems someone else will.c) global competitiveness: 70 % Facebook users out US

      1. Rick Bullotta

        Sorry to disagree, but I don’t think Facebook helps our global competitiveness in any significant way whatsoever. ;-)Regarding “soft” problems, I have no issue with solving them – but when it comes at the expense of solving “hard” problems and mortgaging the future, I do have an issue.

        1. kagilandam

          Word.There are LIKE (soft) to have features and MUST (hard) have features.If like to have features are taking sources/resources from must have’s then there is really a problem whether it is a company or a country or a tiny-ball-third-from-the-sun

        2. Guillermo Ramos Peralta

          Fully disagree, but perhaps we could agree on Soft VCs and Hard VCs (& a bunch in both) 😉

          1. sbmiller5

            “A bunch of them in both” is what I find scary – too many generalist VC funds don’t seem aware of this issue and aren’t adapting their own strategies for each world.

          2. Guillermo Ramos

            Agree. LPs to pick up the right GPs with the right strategy with the right size with the right fees with…. the right Due Diligence before investing

        3. fredwilson

          just like movies in the 20th century was our way of exporting our culture, internet and social media is the samethis is hugely impactful globally

    2. JLM

      Agree w/ you completely, but I am absolutely certain that American software development know how is a “strategic” industry — much the same as car making prior to WWII, which morphed into military vehicle manufacturing — and should be fostered at great effort.It is pretty clear that we are currently at war w/ the Chinese with particular evidence being the level of strategic hacking and the satellite front.This war is likely to continue for a long, long time and will be fought by programmers and hackers.Why bomb the Pentagon if you can simply turn it off?Having said that, I agree completely with your observatons.

      1. fredwilson

        i don’tit is a false distinctionas i’ve explained in my replies to him above

    3. John Ball

      Rick, thanks for capturing my sentiment. Having been involved with ‘software’ startups since the late 70’s, the current focus on small'”widgety’ solutions to measure or enhance customer acquisition and ad revenue production, while interesting, is extremely dissatisfying.To be fair, it feels a bit like another form of business efficiency; outsourcing incremental development to 3 people and a dog who are modestly funded by super angels. Once the ‘widget’ gains humble traction, a founder, 2 co-founders, and the dog find a buyer and emerge post liquidity as super angels.I ask myself everyday, which of these efforts is creating the next Cisco, HP, Intel, or Microsoft?

      1. Moses

        If you asked anyone else, they would tell you: Facebook.

        1. John Ball

          Perhaps, Facebook, with circa 1700 employees begins to approach being an example. Facebook has addressed an unmet market need for advertisers while creating a market for social games (Zynga), which in turn meets many of the criteria for sustainable business. And while it’s foolhardy to suggest Facebook will go away, it’s still too early to claim that the current social phenom on which it builds its business is economically sustainable.Taking your assertion to another level, it’s reasonably simple to describe the positive economic impact Microsoft has had on global business; it’s employees, partners, development community, and the effects of the platform suggests that many tens of thousands of jobs have been created out of the MSFT effort, including (cynically) many lawyers.Taking nothing away from Facebook, the firm enjoys global visibility and attracts millions of users to participate, and it may be by some measures the second most successful company of this time, yet the economic reach of Facebook’s success does not begin to approach, and may never approach that of Microsoft, etc.

          1. fredwilson

            google has been way more impactful on global businesses than microsoftgoogle makes them moneymicrosoft is cost on the P&L

      2. Sebastian Wain

        Sharing and repeating John Ball sentiment:”The software VC business has been fundamentally altered by the massive decrease in the cost of building and launching a software based business”, this is also repeated “ad nauseam” and I think is half of the truth: If you want to launch the next office suite to compete Microsoft Office it requires a lot of capital (I don’t agree that stuff like Google spreadsheets is a long term challenging competitor). IMHO the massive decrease in cost of building SOME software is at the expense of a longer term and sustainable vision, I can’t mathematically prove it, but the shorter cycles we are seeing (yahoo/altavista => google => facebook/twitter Netscape => IE => Firefox => Chrome) put more risk to longer vision investments.With all due respect we don’t know if sites like facebook and twitter will be in the 1st,2nd or 3rd place in ten years. At the same time I think Microsoft will continue to be at the top (Microsoft can be replaced by IBM, Oracle or VMWare).So, again, who is investing in building the next Microsoft? I think nobody and I see (assuming risk) that you can compete fairly well with products like Microsoft Project or PowerPoint, but it’s more difficult to compete with Outlook, Excel, Word because they are very integrated in a complete system (VSTO, Servers, etc). At the same time I see opportunities to compete with the excelent One Note. IMHO one of the issues is related to many developers developing their careers at the web [understandable hype] without seeing the whole perspective.Note: Microsoft is just an example to illustrate the idea.

        1. fredwilson

          i disagreemicrosoft is slowly but surely going away in our livesi would happily take a ten year bet on facebook over microsoftmy kids don’t use one piece of microsoft software and i don’t expect they ever will

          1. Sebastian Wain

            Microsoft has been in an apparent risk many times before, and for many decades, but they continue to be here. They have built a network effect with partners. From the business point of view Microsoft helps more companies to do real business than Facebook (I addressed the issue better in a previous post about open vs closed:… )It’s true that Microsoft is currently an outlier in hot areas like mobile or [consumer] web applications (who is starting a web company using or sharepoint?) but we need to wait what happens in the mobile space.I make a symbolic bet here for the next 10 years. Surely they have a big cultural problem and some friends seems like zombies or brainwashed when they recommended IE8 or Vista. But again, they have a lot of cash and a crisis can be good for a change.Also, an important topic that I didn’t see here and where Microsoft is in a good position is multicore development tools.About the kids… I was not expecting to use (and live “thanks to”) Microsoft products until 8 years ago… (^_-) It was not my idea.

          2. John Ball

            Fred, we are not in disagreement about the relative importance of Microsoft products to the next generation and we can break our necks agreeing that MSFT has failed miserably to recognize and capitalize on changes surrounding the moat known as Redmond.But I feel that you sidestepped the point some of us were trying to make.Setting aside the meaningful impact consumer (media) software is having on all of us (it is indeed shaping our very behaviors just as many previous software developments, albeit on a larger scale), the issue remains; how will these small scale VC investments scale to create meaningful job growth? If we won’t see job growth at these software firms, will the growth come to as yet unknown “industries” or “services” created by these firms’ efforts?Again, who is building the next HP, Intel, Cisco, Google?

    4. Guest

      I agree with this totally.I see very little value in things like foursquare. The founders of foursquare are brilliant. Imagine what they could accomplish if they applied that brilliance to something meaningful.

      1. fredwilson

        foursquare has just gotten startedtheir vision is nowhere near what they are delivering to the market todayimagine what they can accomplish if they have a decade to innovate

    5. fredwilson

      sometimes vacuous turns out to create real valuewhen twitter started out, it was derided as a way to tell people what you were having for lunchnow serious candidates for national office use it as a way to get their messages outthe idea that it has to be capital intensive to create real value is a red herringmany of the most value adding disruptive technologies did not take much to develop

  16. Alex Murphy

    Where would you classify the VCs that are more growth oriented that focus on existing businesses that are more mature? Would they go in bucket 2, or should they go in a 3rd bucket?

    1. Kyle Pearson

      I was wondering about this too. Are late-stage VCs a totally different bucket, or do most early stage software VCs usually have the firepower to get their portfolio companies to an exit?

    2. fredwilson

      great questionlate stage in software based businesses is changingmany companies get profitable or sold before they need that layer of capitalso that layer is turning more and more to providing secondary liquidity

  17. ShanaC

    They need to meed at make babies. Software has a lot to give to other businesses because of its algorythmic capacities. It can save lab time in some definite cases, help optimize power, yada yada. I sometimes wonder if it is fear or some other issue that prevents a software person from hanging around a whole other industry for a bit. Expanding your knowledgebase isn’t bad for you either! It’s not a bad thing to learn about biology suddenly and write programs about viruses to start modeling them!Hybrid models are generally stronger too- so go ahead now…lets see what you got (I bet it is very smart)

    1. Jared Seehafer

      Speaking as someone who lives in biotech/medtech, the lion’s share of the capital required is not for any R&D or product development process. Its for keeping your company alive during the 5-10 year runway needed to navigate the clinical trials, regulatory and reimbursement minefields.

      1. JLM

        A very, very important fact to be bandied about amongst those who favor more or less government regulation.

        1. Matt A. Myers

          I personally think requiring a company to pay to make sure their product doesn’t kill people is fair.

          1. JLM

            You will note that I was not taking a side on this issue but rather simply pointing that the amount of regulation has some bearing. I agree with you when the issue is truly mortality but there is much that does not approach that level of seriousness.

          2. Matt A. Myers

            Yeah, I didn’t think that – sorry if it seemed implied by my reply.

          3. ShanaC

            can or can’t software help?

    2. Carl Rahn Griffith

      The software industry has become a tad – to me – too pre-occupied with a pseudo rock-star/celebrity kind of zeitgeist and I believe this very much distracts from the job in hand.The ‘other’ sectors in the ‘other’ VC industry are – typically – far more purely clinical/engineering driven and more sombre as a result – so attracting very different VCs for this reason alone.

      1. fredwilson

        that is because consumer software is mediacritical success factors emulate the media business way more than enterprise software

        1. ShanaC

          Non-consumer software that can make big waves doing something???

  18. David

    And now the question is, how does the first VC industry compete with other forms of raising capital? Is it being priced out?

    1. JLM

      There is fundamentally NO capital for small business in the US today. If you are a Fortune 100, you can tap some bond money at unbelievably low rates. If you are a small business, your bank is totally frozen.VC funding was committed and aggregated, in great measure, before the loan window slammed shut and therefore is relatively abundant.Raising the money has always been the first test of manhood for any entrepreneur and so it remains.

      1. fredwilson

        we are investing in small businesses JLM

        1. joeagliozzo

          VC’s invest in “scalable” small business, which is a tiny, tiny minority.I believe JLM is referring to the rest of “small business” – the vast majority, where there is no access to capital, even if you are profitable (and even profitable and growing).There is a huge opportunity here.

          1. fredwilson

            TrueMy wife and I invest in those kinds of businesses personally and you areright that in many cases there is nobody but us willing to investGood for us if the investments work. But it is bad for entrepreneurs and oureconomy

  19. dbrand

    It will be interesting to see how high capex VC changes over the next 5 years. Per the data of “more deals in SW vs more money to biotech and cleantech”, it is largely because there are vastly different value inflection points for different types of investments, e.g. clinical trials for multiple compounds in biotech and the crucial scale-up and project-based funding for cleantech. Both expensive and risky at the same time.The interesting part will be, IMHO, when certain VC firms notice the value that is inherent in applying cross-principles and talent form other industries into life sciences, cleantech, etc. Those who break away from the common syndicated model and to “innovate” from an investment sense.Might be considered risky by VC standards, but we are now in an era where drug discovery is being seen as more and more inefficient and there are opportunities for more and more innovations in healthcare to be decentralized and moved to the point of care, there is definitely an opportunity to think less conventionally with regard to non-software-type investments.

    1. fredwilson

      wow. that is a very interesting suggestion. that CT and BT can emulate software and become highly capital efficient. that would be terrific if it could happen.

  20. Mark

    Here in Michigan, the capital-intensive one dwarfs the other by orders of magnitude. However, I do predict that rust belt will too permeate the app industry in the near future. What I mean, is that in the Valley, style is so much of the upfront experience. However, in the Midwest, function enables style.I need coffee.

  21. Aviah Laor

    Eventually both will have to work in tandem.The capital incentive cleantech etc will need the light and agile tactics to create and gain new markets and mind share, like the light software startups learned to do so well. Bringing those capital incentive innovations into real market usage, via web and mobile “light” startups, can create a new class of investments.

  22. herve

    I did not read all the comments yet but just tell me where KP and Sequoia stand? Don’t they do both?Aren’t these the real VCs?

    1. Guest

      KP does both and has gone heavy into cleantech. Sequoia largely only does IT.

    2. fredwilson

      they are most interesting case studiesKP in particularKP was the greatest software VC firm in the 90snot so anymore

  23. fnazeeri

    The jury is still out on whether investing in non-capital-intensive businesses (e.g. software) can be a successful VC business. I think we’ll only know in 5-7 years when the 2005-2007 vintage funds that invested in software businesses come in with their returns.My bet? Some funds will make money on software…most will lose and overall the “capacity” won’t be large enough to warrant the “industry” label.

    1. fredwilson

      biotech has worked as a VC sector for thirty years

  24. Fred Lybrand

    Fred – great post.About ten years ago there was another cleaving of the VC industry – life sciences split off and became its own thing. At that point you had ‘Bio-VC’ and everything else VC. The length of drug development and regulatory approval process made it such that those who were good at Bio-VC were unlikely to have cross over skills that could be used elsewhere.The splitting now (and it would look like an evolutionary history) is that IT-VC is splitting off from everything else VC. The three current lineages are bio-VC, IT-VC and everything else. Since VC is a service industry (a derivative of fin’l services), when its practitioners become skilled enough, they should instead look more like the industry their companies sell into, than they do their peer VCs; it’s speciation, but for finance instead of Darwin’s finches.

    1. fredwilson

      nice historical observationi would suggest that cleantech and biotech have very similar risk return characteristics, but for very different reasons. i like to put them in the same bucket

  25. kenberger

    This was exactly what I was thinking when I asked the other day (on the Outsrcing post) whether USV considers its entire portfolio as software companies. Today’s post seems to imply an even stronger ‘yes’.

    1. fredwilson

      you inspired me with that questions kensoftware engineering is at the heart of every company we backit’s a good insight/reminder

  26. Dan Sweet

    “This (second) VC industry operates largely the same way it has operated for the past twenty or thirty years.”Not so sure on this one. It is my impression that the rise of non-US sources of capital and sovereign wealth and investment funds over the past 20-30 years has been significantly disruptive to this “second” VC industry. I’d expect that the global competitive environment looks much worse to VCs in this second industry than it did 20 years ago.

    1. fredwilson

      yeah, that’s a related but different issueSWFs are having a huge impact on the global VC businessthey are impacting both the software side and the non software sidei commented about that at the event that i mentioned in this post

  27. Adrian Scott

    cool thoughts and neat insight, i’m looking forward to the numbers.i worry about the govt-coupled piece of VC also (e.g. cleantech dependent on govt rulings)…

  28. jdavid_net

    maybe we need new tags.#sVC = software VC or small VC#cVC = capitol VC

  29. Josh Rehman

    Yes indeed, that makes sense. Now it’s up to you, Fred, to name them! You know the meme will never catch unless you come up with a good name. Here are some ideas (with usage example):1. VC (Heavy) VC Lite. “Oh yeah, I won’t bother pitching to them. They’re too Heavy.”2. “AdVenture Captial”. Ancronym of AVC, of course. “Fred. Yeah I know him. He’s an Adventure Capitalist!”3. Empire VC vs. Rebel Alliance VC. “The guys across the hall are funded by the Empire. Us? We’re Rebel Alliance all the way baby!”

  30. KJ

    I agree that Facebook can be a complete waste of time, with nonsensical and innane comments. However, I am forever intrigued with the study of people and socialization. It is what drives everything. And Facebook is a window into that.

  31. Rick Bullotta

    Perhaps in the world you live in, Fred, but I would make the case Microsoft has been just as impactful (perhaps not so much today), but I can assure you that very few manufacturing plants would be functioning as effectively without Microsoft’s technology. In fact, Microsoft has almost total domination as the server and client platform for plant floor applications (probably 90-95% market share). And don’t forget that there are roughly 4-5 blue collar workers on the planet for every white collar worker. So, I’d have to say that your use of “has been way more impactful” is patently untrue. It is a cost (just like the tithing one pays Google) but has also had a substantial ROI. You don’t get somethin for nuthin.More people need to get out into the “real world” more often. 😉

    1. fredwilson

      i suspect that Linux is making headway in those markets

  32. bussgang

    Fred – you are dead on here. At Flybridge, we straddle both worlds and so I have seen it evolve over the last few years. Two observations: First, we need more VC bloggers from “the second VC industry”, i.e., healthcare and energy. I wrote a post on this recently: Some great voices are emerging, but more are needed. Second, I have observed “lean start-up” methodology being applied very successfully to health care and energy start-ups. We have done this in three or four companies very deliberately and it has yielded excellent results. I am co-writing a case for HBS on this topic as part of a new course I’m working on with Professor Tom Eisenmann on lean start-ups. I’ll follow-up with you with dates and an invitation to get you to come to HBS to speak to the students on this topic and others, as we discussed a few weeks ago.

    1. fredwilson

      do you think that bio and cleantech can become capital efficient enough tostart to mirror some of the trends we are seeing in software drivenstartups?

      1. Bryan J Wilson

        I’m waiting patiently for this – it’s desperately needed.

  33. Jake Rocheleau

    Interesting opinions.. I’ve never really considered breaking up venture capital investments into 2 entities. I’m excited to see some numbers here

  34. JLM

    Fair play. As I wrote, I meant the banks. And that VC was the exception.

  35. JLM

    The Internet has become the biggest competitor for the most important resource that a person owns — TIME.Once time is invested, then other alternatives are “Kings X-ed” — not overcome by direct and comparative competiton but vanquished because there is simply a finite amount of time available.Think about that surfing session you had where you suddenly looked at the clock and you had been goofing away for 3 hours.

  36. JLM

    Interesting observation. In some ways it is infinitely more powerful as it is not limited to 90 minutes Hollywood and provides an unvarnished view of American culture but the same is also true in reverse.Think how much more culture one absorbs in routine (?) travel these days with but a bit of research?The world — physically and intellectually — is getting smaller and smaller and more accessible.It will be interesting to see what this means in the long run.As an eternal optimist, I must say I see huge implications bordering on world peace as the interplay between individuals supplants — well, at least supplements — the “official” relations between people. A perfect example was the recent unsuccessful Iranian revolt where revolutionaries were tweeting in real time.

  37. JLM

    MS is becoming a utility and is becoming ubiquitous — hiding in the shadows. Any ideas they cannot germinate directly, they will buy. Not unlike Google.

    1. Dave W Baldwin

      ….and/or everyone else.

  38. JLM


  39. Will Foster CTO

    Yes Sir, I have been living that the last few months as a Clean Tech Start Up in a Software world. Two very different animals.

  40. Mark Essel

    Is it worth even considering how we may make one of these industries look more like the other?

  41. George A.

    …the new paradigm builds moats out of lower cost phenomena like “network effect” and “embedded mass adoption” in lieu of the more capital intense “intellectual property”….thus, the lower cost of entry.people use twitter because it workstwitter works because people use itpeople use drugs because they workdrugs work because of intellectual capital

    1. fredwilson

      Great line about twitterBut I would add ‘when it works’Fortunately that is much more often these days

  42. paramendra

    I like your dipping into “clean tech, bio tech,” nano tech. I think you should touch upon them whenever you can. And not just stick to your home turf of web services.

  43. Tyler Beerman

    Short and to the point, I like it…. You couldn’t be more right, just look at the ‘sectors’ Kleiner Perkins invests in…. they see things the same way, I guess great minds think a like!

  44. Cedric

    I would not entirely agree with this post. I agree that initially it may not cost much for an internet/soft business to get started BUT to reach global ambitions they still need to raise a lot of money: facebook, Zingas,Twitters, Spotify here in Europe still had to raise XXXM$. In the same order of idea, you can also, although more difficult, try to build cheaper (at least initially) cleantech companies (can’t comment on biotech). I am involved with an organic solar cell company that managed to get a beta product with under 100K….

  45. Jfbutz

    About two months ago I attended a conference in Anaheim CA where I listened to a panel of four Venture Capitalists who were investing in various cleantech opportunties with clean energy mostly around solar and new battery types. They all had a similar story about the time to market for these new technologies and it started to sound a lot lile Pharma. The technologies they were talking about were all about 10 years from being a product!From a fund perspective, I assume that this means that these funds have to have a different arrangement with their Limiteds and set different expectations on timings when putting the fund together.

  46. MITDGreenb

    Sorry to join this discussion so late. I am finding it quite enlightening for a particular company I’m fundraising for.In any case, I wonder if “software” VC is perhaps a little too broad. It’s certainly true that there is a separate investment thesis and style for consumer software (and media). However, enterprise software businesses tend to have more of the B2B dynamic of, say, enterprise hardware. You need a lot more engineering (including a LOT more testing) than consumer… and you have to deal with the same low-credibility with corporate clients and resultant long sales intervals that any data center hardware maker faces.So, the question is, should “software” VC’s be investing in enterprise software? And what if the software enables an enterprise to deliver a consumer service?