Robert Cringely writes that AJAX, Google, and YouTube are forcing venture capitalists to adapt.
The old model was for top firms (those run by intelligent people) to look at 800 deals per year and invest in two to six, pumping them with enough money to assure success while also killing off the founders and pushing for an early IPO and VC cash-out. The other VC firms just watched what the top firms were doing, then bought in on B or C rounds where the risks and returns were proportionally lower.
The new model is venture capital masquerading as a combination of hedge funds and investment bankers. Seed rounds are the only rounds and they are limited to angels, friends, and family. Very few companies go public and those that do are unique in their niches. Acquisition has always been the other exit strategy, but if the VCs don’t have a piece of the company being acquired, they can’t enjoy the benefits of a sale, so what’s to do? The VCs start acquiring companies, that’s what, in a classic hedge fund maneuver called a “roll-up.”
A related story on Founders Fund from San Francisco Chronicle.