Why VCs Aren’t Fundamentally Being Disrupted

Ben Thompson at Stratechery recently wrote a very interesting piece about disruption in venture capital. By and large, I agree with Ben’s view that some aspects of venture investing have changed forever due to the advent of smaller, nimbler angel investors and incubators. However, consider this quote:

The more important takeaway, though, is that this upheaval is happening at all: even a seemingly impenetrable clubby human interaction-driven industry like venture capital is susceptible to change that, in retrospect, is really quite radical. (Emphasis mine)

Is it true that venture capital is really undergoing radical change? The answer is, in one respect, a resounding yes. That is, if you’re interested in *who* is doing what are arguably the most important deals, it’s the guys investing early in ideas. The *who* used to be VCs, and now, as Ben points out, it’s angel investors and well-run incubators like Y Combinator. There’s definitely substantive change along the *who* parameter.

Yet the larger gist of this article is that the VC world is experiencing the kind of fundamental disruption that industries as diverse as publishing, television and hotels have experienced.

I don’t buy that, and let me explain why by way of analogy.

Airbnb didn’t only displace *who* did the renting, it also displaced *what* is being rented. An annex to someone’s home is not the same product as a 4 star hotel room — even if in some economic contexts these are substitute goods. This isn’t a bad thing at all, since for many Airbnb users a cozy annex or a small room in a large abode is much better than a neat but vanilla hotel room.

So, why does this feature of Airbnb’s lifecycle matter? Well, think about how significant it is that Airbnb disrupted the *who* and the *what* of the short-term rental market. By changing the *what,* Airbnb was able to expand into international markets without having its own real estate, its own global deal team, or any of the other trappings of a large hotelier. By reimagining the who and the what at the same time, Airbnb grew quickly without the kind of practical hurdles that a traditional real estate conglomerate would have faced.

Now, think about the product that angel investors provide. What is it? It’s investment dollars. And what do VCs provide? Investment dollars. Ahah, so the product doesn’t change? Nope, in the most fundamental respects, the product is largely the same.

So what does that mean? Well, it means that disruption in venture is not going to follow the same general pattern as disruption in other contexts. While the *who* is changing, the *what* — the provision of investment dollars with the expectation that (i) a small % of startups will yield insane returns (ii) while the bulk fail miserably — is not changing.

The substantive function of the banking niche known as *venture capital* largely remains the same even as people with different honorifics (“angel investor”) write the checks.

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