Investment banking and private equity firms provide a road map for how the venture capital may develop.
Venture capital has been insulated from the capital intensity that fueled consolidation of the investment banking and private equity industries.
The leading investment banks and private equity firms were closely held partnerships for many decades, before increasing capital intensity required a change of corporate structure.
But like the investment banking and private equity industries, venture capital is becoming more capital-intensive.
Venture firms are moving from job shops to scaled organizations with an armada of specialists in human resources, marketing, finance, engineering, legal and investor relations to support their investment and fundraising activity.
A few boutique investment banks and private equity firms have withstood the scale and capital advantages of bulge bracket firms.
But as more capital entered public securities markets, securities trading houses such as Merrill Lynch encroached on Goldman Sachs, Morgan Stanley, Lehman and Kuhn Loeb, which then dominated highly profitable investment banking.
And “lean startups” that rely more on company-building services offered by their investors are not “lean” for venture firms that must build out service capacity in talent acquisition, sales, product marketing and finance to accelerate venture growth.
Today, staff devoted to supporting startup development often exceeds investment professionals in large venture firms.
Venture firms with expertise in specific technologies, industry sectors or geographic markets will still produce superior returns.
Hundreds of venture firms are starting in cities and countries that were previously considered deserts for technology innovation.