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How VC species has adapted to survive

The first dotcom boom created seismic shifts in the tech business investment market – shifts that are still being felt today. James Clark, policy manager at the British Venture Capital Association, highlights new research that shows how the market has evolved.

James ClarkTwo hundred and fifty million years ago, something wiped out nearly 96% of species on earth. We’re not exactly sure what that something was: comet impact, a massive release of methane in the world’s oceans and volcanic activity have all been advanced as potential causes. Sixty five million years ago, a global cataclysm wiped out the dinosaurs. Scientists are now fairly certain that the culprit then was comet impact in Mexico.

These are examples are what scientists refer to as “extinction events”. They cause mass devastation, killing large numbers of species, particularly large creatures and result in enormous upheaval of our planet’s ecology. But they have an upside – any species able to survive receive enormous benefit as they have a chance to thrive in the period that follows.

What happens in ecology can happen in business.

The crash that followed the dotcom boom of the late 1990s has been seen by many in the venture capital (VC) industry as an extinction event. The mania that had gripped the tech industry at the turn of the millennium swung to panic within a few short months as the entire industry collapsed like a house of cards.

Sure, there were some crazy investments in ludicrous business models, but it was the interdependency between tech startups that caused the real damage. As one group of startups burned through their cash reserves they stopped ordering from others and so on.

The contagion was unstoppable. The NASDAQ dropped by half in the 12 months from March 2000. US venture capital, which had raised over $100bn in 2000, achieved barely a tenth of that in 2003.

UK venture capital, which saw its record year in 2001, was also down by 90% by 2004. The turmoil from 2000 to 2003 saw the tech industry become a byword for hubris. The US recovered reasonably quickly, with the IPO of Google in 2004 signalling the return of tech.

In the UK, however, the lean times lasted until only very recently.

Despite this, some businesses survived and ultimately thrived. They did so by doing what species do in nature – they went to ground, living frugally, exploiting potential resources, and most of all, adapting to suit the environment.

Businesses like Amazon, seen by many as a poster child for the wild abandon of the boom, were able to survive by making hard decisions and keeping a laser focus on the bottom line. Others like Google, survived because they remained in private hands and were revenue positive, sheltering them from the worst.

Google, which was expanding rapidly, benefitted as many competitors were forced to shed staff. Businesses like these, which were forced to adapt by circumstance, were followed by others who had frugality and adaptability built into their DNA. It’s no coincidence that the methodology of the lean startup captured by Eric Ries was born during this period.

For many in the tech industry, this is a familiar story. We know of the changes driven by the global rollout of broadband and mobile, or the new business models enabled by developments like software as a service and AWS.

VC Evolved coverLess well known is that some VCs have been able to do the same. They’ve adapted to the new realities of the fundraising environment and have evolved to work with the rapidly changing startup environment. Identifying and tracking this evolution was the purpose behind a new report published this month by the BVCA.

VC Evolved looks back over the last 15 years of evolution in the tech VC industry in the US and UK, seeking to understand the events and influences that affect the industry today, and trying to understand influential trends for the future.

By doing this, VC Evolved aims to tie together a wider debate that has been going on within the VC and tech communities over the last couple of years, placing this debate in its historical context.

The debate in the US is particularly instructive, as innovations in tech and VC are often transmitted from across the Atlantic. For the BVCA, the wider hope is that a wider discussion will inform UK venture capital about how to harness and thrive from the rapid pace of change in the industry.

In business as in nature (as Darwin never actually said), it is not the strongest of the species that survive, or the most intelligent: it is the ones most adaptable to change.

BVCA: VC Evolved – how VC has adapted in the 15 tumultuous years since the dotcom boom.