Venture Capital 2.0 ?

Interesting piece* in the New York Times today about AVC blog's Fred Wilson et al's Union Square Ventures being a new type of VC:

Mr. Burnham had spent his career investing in companies that made chips and routers, which differentiated themselves from competitors through groundbreaking technology.

Web services start-ups, on the other hand, use simple, off-the-shelf technologies and cost very little to get up and running. Their business advantage comes from their Web sites’ artistic design and ease of use, and their challenge is attracting and retaining users.

“That’s a different business than the historical bread and butter of the V.C. industry,” said Mr. Burnham. “So we had to change.”

This is something that has intrigued me - Web 2.0 companies tend to be an order of magnitude in cost less to set up than the "dotcoms", so handling investments in them with transaction costs (due diligence etc) at the same order of magnitude doesn't make sense. Union Square is doing sub $1m for sub 20% stakes (c 20%+ being the stake that gives a shareholder some rights in most countries' shareholding rules). This was Angel territory once, because Angels typically can add some real value to the day to day mix, and usually invest in what they understand, this keeping costs down. As the article says:

Because they join companies so early, they take a hands-on approach to building them and seeing them through the growing pains of start-ups. They have kept their team small, adding just one partner, Albert Wenger, and they must all agree before they make an investment, so no one can point fingers when they make mistakes.

In the UK at any rate, a number of the larger VC's have exited the startup market - some publicly like 3i, others in all but name. The interesting thing is whether this "Venture Angel" model is sustainable longer term, or if it is more just benefiting from being into the trend early (ie do VC's rush in where Angels fear to tread?). As the NYT notes:

Union Square’s investment strategy will continue to be tested. It is much harder to find promising Web start-ups now than three years ago. There are so many services and so much more capital financing them, and users have less time and attention for new offerings.

We hope it is sustainable, and is transferable to the UK, because in the UK the "Equity Gap" for small companies between the first £100k / $200k and the VC investment is a real issue, and all Her Majestys Government's attempts to bridge it with 50/50 grants etc have not really worked. Not sure about all that capital being around after recent weeks either. Whether there are still pickings in the 2.0 market is less clear though - again, quoting the NYT:

The partners said they planned to look at how Web services might transform sectors not yet touched in a big way, like education and the environment.

Ah yes...the Green wave, a well trodden path . I suspect to make money this way you need to be ahead of the main wave, not in its midst.

*In response to offline comments - yes, its a puff piece, but its interesting nonetheless. And yes, I am well aware that an early investment sets USV up well for follow on rounds. But it is still a play in the Equity Gap level, which in the UK anyway is rare.