Sacred Cow Dung

This "Build vs Buy" trend is actually a direct result of the maturation and differentiation of the Venture Capital Industry.

Remember: A Venture Capital Firm is a business too ... and they compete with other Venture Capital Firms -- both for resources and for customers

Venture Capital Firms have investors (fund managers) who have entrusted them with money to build products which need to be sold to customers at a markup inorder to return to their investors both the capital they put up and a portion of the profits.

The products a Venture Capital Company sells are companies
and
a Venture Capital Company's customers are generally the public markets or companies willing to buy other companies.

Like any other successful company,

Venture Capital Firms must sell an "accurate market hypothesis" to their investors (the fund managers) --

in other words, they must convince their investors that

1) there is a demand for product (ie a "Seller's Market" NOT a "Buyer's Market")
2) they can supply product their customers demand better than their competitors

Like a good shopkeeper who knows his customers well, they only stock what they can sell and nothing more ... no reason to build an inventory of very very expensive products that nobody wants to buy

Being good entrepreneurs themselves, Venture Capitalists must first find a class of customer who is not only looking to buy but has the resources to pay (eg Cisco) ... then they must determine EXACTLY what their customer requires ... once they know what their customers want (determined the demand), they need to find a supply to sell them ...

Venture Capital Firm customers (eg., Cisco) can buy from three sources -- Investment Bankers, Private Equity Guys, and Venture Capitalists

Investment Bankers will try to clear existing inventories by force fitting existing inventory to meet the customers requirements ("off the rack")

Private Equity Guys will try to do some "alertations" of existing product by gluing together pieces from existing inventory ("alterations")

Venture Capitals will actually try to build new product ("tailored") (this takes the most time -- so they must be convinced the demand is large enough and will last long enough that the Investment Bankers can't meet the demand with existing inventories and the current production pipelines from the Private Equity Folks)

So, like good shopkeepers, VCs aren't just sitting around waiting for vendors to show up with cool new products to sell their customers, they actually know what their customers want and they are out and about looking for "the right products" to sell them ... they are PROACTIVE and go out looking for product and they know when they have found it ... they are, in effect, a proxy for their customer, ie their "personal shopper"

Now for the trend ...

if VCs know a demand exists, but they can't find a supply, then they must consider "creating the supply themselves"

The good news for Entrepreneurs is that VCs know it's a pain in the ass to build product themselves -- so they ALWAYS prefer someone else do the work -- but if they can't find a supply, they still have investors and must still sell product -- so they must consider whether or not it's worth the hassle to build the product themselves ...

So we ARE seeing a trend, particularly in very specialized niches, where the VCs have very very specialized understanding of their customer's unique requirements such that it is getting easier and faster for them to met their customers demand for product by just building what their customers want rather than hoping to find some random entrepreneur who has serendipitiously come up with their customers exacting requirements ..

this makes some sense and it is increasely what these funds are pitching to their investors (fund managers) to differentiate themselves from their more passive "money babysitting" brethren ...

This is the "Build vs Buy" Trend you are seeing among VCs involved in early stage company formation in highly specialized industries ... and with the IPO markets essential closed, the remaining customers, companies who are willing to buy other companies, have much more detailed buying requirements than the "public markets" in general

Therefore, VCs in these firms are getting much more proactive and looking more and more like an interesting hybrid animal -- part entrepreneur, part investment banker, part consultant -- and are now armed with capital ...

While the life of most VCs is generally not very attractive to entrepreneurs, successful VCs in these more specialized and proactive firms are more likely to have been formerly successful entrepreneurs -- and, perhaps the decision to "Build vs Buy" is tilted slightly more towards "building" by their underlying entrepreneural temperment -- the interplay between 1) confidence in themselves and 2) impatience with the world -- ie make your own opportunities rather than wait around for something to just happen on its own.


Christian Mayaud | Managing Director | The Verticom Group
cmayaud@theverticomgroup.com | 914/239-3733 | Skype ID cmayaud
"Intelligence is like Four-Wheel Drive ... It just gets you stuck in more remote places." -- Garrison Keilor

Thanks for signing in, . Now you can comment. (sign out)

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)

URL:
Remember me? YesNo

Comments: