One thing I suspect will change for VCs is the 2/20 model.
Because the cost of building a startup is going down, and assuming the opportunity lies in early stage investments, VCs are going to have to make more early stage investments than they are now.
VC operating expenses are covered by a 2% management fee levied on assets under management. This incentivizes VCs to create megafunds so that they can have proportionally mega salaries.
Seed stage investments come at a totally different operating cost.
Seed-stage investing is pretty hard with a megafund because they are so expensive operationally. VCs would much rather write a 50M check in a growth round for 33% of a company than a 100 $500K checks for 5% of each company. They might have to talk to 20 companies for the growth rounds to make 1 investment, but they'd probably have to talk to thousands to make the 100 investments in seed rounds. That means they need a bigger staff and that 2% model won't work.
In fact, I've heard VCs say that the only reason they write small checks in seed rounds is so that they have a strong relationship with the founders and pro-rata rights if the company happens to blow up.
I suspect that VC salaries will go down like crazy, and they'll be forced to rely on carry for the funds earnings. Which is probably a good direction for VCs to go.
Because the cost of building a startup is going down, and assuming the opportunity lies in early stage investments, VCs are going to have to make more early stage investments than they are now.
VC operating expenses are covered by a 2% management fee levied on assets under management. This incentivizes VCs to create megafunds so that they can have proportionally mega salaries.
Seed stage investments come at a totally different operating cost.
Seed-stage investing is pretty hard with a megafund because they are so expensive operationally. VCs would much rather write a 50M check in a growth round for 33% of a company than a 100 $500K checks for 5% of each company. They might have to talk to 20 companies for the growth rounds to make 1 investment, but they'd probably have to talk to thousands to make the 100 investments in seed rounds. That means they need a bigger staff and that 2% model won't work.
In fact, I've heard VCs say that the only reason they write small checks in seed rounds is so that they have a strong relationship with the founders and pro-rata rights if the company happens to blow up.
I suspect that VC salaries will go down like crazy, and they'll be forced to rely on carry for the funds earnings. Which is probably a good direction for VCs to go.
Chris Dixon outlined the problem here too: http://cdixon.org/2009/08/26/the-other-problem-with-venture-...