VC1.0, Stagflation and VC2.0 Preambe

Peter Rip of Leapfrog Ventures has a humorous piece on On Everything 2.0 and takes a dig the 2.0 trend with Arithmetic 2.0. Then he gets serious with Venture Capital 2.0 a series on paridgm shift in the (IT) VC space. First in the series, Venture 2.0 – Preamble traces the

The sequential evolution of the IT “food chain” from semiconductor (Intel, National) to systems (Apple, Sun, Dell) to software (Microsoft, Oracle) to services (Yahoo, Google) has been the underlying order.

and goes on to say

And some firms are already responding. The move to Cleantech is a move to exit IT (or diversify) to find alternative industries. The move to build Indian and Chinese outposts are brand extensions.

Some highlights:

Success in IT venture capital investing has been a form of capital and information arbitrage for much of the period up to the late 1990s. The scarcity of risk capital and the scarcity of insight about evolution of technologies and technology markets made it possible for astute venture capital firms to transform access to capital and superior technological insight into superior returns. For example, as Moore’s Law was driving the electronics industry to the mantra of smaller, cheaper, faster, Sequoia Capital built a franchise reputation in semiconductor venture investments, based on the experience of its two founders, Don Valentine and Pierre Lamond, both early veterans of National Semiconductor.

Success begat success in the venture business. Since venture investments have had payoff characteristics like options, i.e. limited downside and infinite upside, the key to the business has been “deal flow.” Deal flow is about seeing as much of the total distribution of deals, to generate a larger set of ‘long tail outcome’ candidates. Success made IT venture capital business a first-order Markov process, where the probability of the getting the next hit was enhanced by having a previous hit, precisely because of the desire of all entrepreneurs to affiliate with “known winners.” The two masters of this phenomenon have been Kleiner, Perkins, Caulfield & Byers and Sequoia Capital.

Worth checking out and worth staying tuned for more.