Andreessen Pulls a Bezos

Cheap money and power-law profits are killing venture funds and birthing venture firms.

Venture capital investors are big fans of the word “strategy,” but they hardly give it much thought in their own business. Historically, venture capital firms competed by outdoing their peers in the same activities; they tried to answer emails faster, be nicer to founders, have a broader network, offer better terms, recruit smarter and better-known partners. Firms differentiated themselves by focusing on different funding stages, sectors, or geographies. But ultimately, their business was quite similar to that of their competitors. Firms that did well had more money to spend on doing the same type of activities even better.

Investors thought they were strategic, but this was only true to a minimal extent. As Michael Porter points out in the book about strategy, acting strategically means “doing different things” rather than “doing the same things better.” To understand the difference, compare the competition between Burger King and McDonald’s and that between Hilton and Airbnb. The former two companies compete by trying to outdo one another in the same activities (franchising, menu construction, sourcing material, advertising). The latter two companies compete by doing completely different things: Hilton operates whole hotels, trains and employs thousands of service staff, and has strict guidelines on how its rooms are constructed and maintained; Airbnb, on the other hand, operates a website and app and has zero involvement in operating or designing physical assets.

The non-strategic approach worked reasonably well for venture investors until now because they faced limited competition. They did compete with each other, and they sometimes felt the competition was fierce, but they still operated in a world governed by scarcity. There were more risky venture companies looking for money than investors (or dollars) looking for risky ventures.

This world no longer exists. But before we get to that, let’s consider an analogy that helps clarify my point about competition.

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