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Thursday, May 26, 2005

The Changing Landscape Of The Software VC

I wrote a small note on Sandhill on the changing landscape of the software VC. Am publishing a brief abstract here:
Five years now on, half the venture capital firms in business today would cease to exist,and there may be just half as many companies getting created;the next five years shall also see a new look software industry landscape substantially altered from what we see today.An infectious greed powered by”irrational exuberance” characterized the recent past in the VC community calendar. The key themes noticed by few VC’s who instituted new management investment strategies, which a majority of VC’s failed to notice include:
- Not recognizing that the relationship between emerging technology vendors and established multi-product line vendors , failure to recognize that the ecosystem of tech users, buyers and vendors had become far more complex and assumed a unique pattern,and a flawed due diligence approach.

Several long-term trends have been quietly at work in the VC industry for the past two decades or so: an increasing concentration of power and profits among a handful of firms; a widening gap between the returns of top-tier firms and everybody else; and the emergence of branded firms/partners that set the direction of the industry. In time, we may see a smaller, more exclusive, and more stable industry, one in which the bulk of profits and power are concentrated in as few as fifty firms with some more playing the role of supporting players. With all the experience gained thus far it is increasingly clear that the venture capital industry will go back to the basics: long-term plays, focus on value creation, develop long lasting markets & stay away from hype or anything resembling a bubble. Value-added funds which specialize in few focused arenas would win, creating a competitive advantage in a crowded middle market - sector focus and creating specialized interconnected networking shall be counted as truly value adding Paradoxically, the maturing VC industry doesn’t mean it is becoming more ‘efficient,’ in the classic sense of the word. Understanding the ecosystem – sometimes well thought out, sometimes fostering vested cross holding interests and taking appropriate decision is the key to success. Providing leadership vision to the industry, enabling capable leaders across the world ( Asia – increasingly the tech center of research and large user has seen limited support- that ought to change), fostering creativity and innovation, and creating enduring enterprises are the key challenges to the VC industry as it successfully transforms itself and marches on. Read the full piece here.

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