Bits | The Business of Technology - August 3, 2016: Venture Capital’s Endangered Middle Class
Wednesday, August 3, 2016
Wednesday, August 3, 2016
A virtual reality headset made by Oculus VR, a start-up that Facebook bought in 2014. Big companies like Facebook, Google and Apple are buying start-ups very early in their life.Gabrielle Lurie/Agence France-Presse — Getty Images
There’s a lot of anxiety about the future of the middle class in America. There should be in Silicon Valley, too, but in a different sense: It’s getting harder to see much of a future for midrange venture capital firms and midsize tech companies.
As Katie Benner writes, a venture firm called Technology Crossover Ventures just raised a $2.5 billion fund. That is more than 25 percent of the $8.8 billion raised across the industry in the second quarter of this year. It’s not that TCV alone will dominate the industry, but rather that there is now an intense concentration of power in a few firms. And it is happening just as there is an intense concentration of power in — and acquisition of new companies by — a few tech companies.
In the first half of the year, the article notes, just five venture firms raised $7.4 billion, or about one-third of the $22.9 billion raised over all by V.C.s. According to the National Venture Capital Association, at the end of 2015 there 798 venture firms in the United States.
“People are starting to wonder if it’s turning into a world of haves and have-nots,” Katie said when I asked her about this. “There are rich tech guys doing angel and seed investing at the low end, then there are these huge funds. It looks like the end of the middle.”
That’s not the only place. Like never before in Silicon Valley, big companies like Facebook, Google and Apple are buying start-ups very early in their life. They want the talent, and unlike the giants that preceded them, they believe that they have figured out how to turn near prototypes, like virtual reality goggles, into big commercial products.
Moreover, the computing infrastructure that powers tech companies is changing to cloud computing. The cloud business is concentrated in just a few companies, primarily Google, Amazon and Microsoft. People at these companies are working on their own gear and buying components in bulk from giant suppliers.
That is going to affect the midsize companies, each making a few hundred million dollars a year and collectively employing tens of thousands of people.
They will have less of a place. They will have less demand, if much of the back end of computing is in a few big cloud giants. And they will have fewer likely backers, if a small number of venture capital firms are trying to invest very large amounts of money.
Which raises another question from the current venture funding: Where are the haves among the venture capitalists going to invest all that money?
There’s still plenty to invent, of course, and some of it is still going to cost a lot, particularly in the more esoteric worlds of genomics, biotechnology and advanced computing. There are big-capital projects, like rocketry and the Hyperloop, a proposed super-high-speed train.
Some of that is the kind of infrastructure investment you would normally associate with a bank or a sovereign wealth fund. But clearly, the world is changing.
Another rich area to pursue, somewhere between traditional venture and infrastructure, is adapting tech throughout other industries — taking big data into agriculture, for example, or bringing artificial intelligence to oil refining. Changing the world can still take a lot of money.