New media investor Alan Patricof on the late-stage component of private equity:

It’s a different kind of business now…These are spreadsheet people. [source]

I’m drawn to the notion that late stage private equity personality types and modes of operation have shifted significantly in recent years. Are there implications for the early-stage side of the business?

A primary change agent for late stage has been tremendous growth in the sector.

Consider that a single prominent private equity firm, Blackstone, recently raised a $21.7 billion fund, fully 85% of last year’s entire venture capital industry investment ($25.5 billion). The following charts non-venture private equity investment over the past decade:

[source]

As the later stage deals have gotten larger and more competitive, room for error has shrunk, and financial engineering has grown more complex, and crucial, to returns. Hence, the predominance of “spreadsheet people.”

What does that really mean though? There’s an interesting personality dichotomy in the industry - those that live for company formation, growth, and creative destruction, and those that live for deal construction and analytics. Even in the early stage aisle there’s both types and many shades in between. And frankly, a reasonable degree of skill in both the qualitative and quantitative aspects of the business are necessary preconditions to individual success. I find it instructive to ask of fellow investors and prospective industry participants what work activities they find most energizing or enjoyable. It’s a couched way of getting at skill and often reveals an individual’s primary value to a firm.

Rare is the early stage investor that primarily adds value at the spreadsheet level, junior professional or otherwise. VCs tend to be extremely relationship-oriented and strategic thinkers, obsessed with high-level models, appropriate metrics, and unit economics (enough to get at the viability of a business and current/projected status, and capable of handling more but less drawn to such work). Pallets of art surround the science.

I wonder, though, whether we’re in for some change, at least in the junior ranks. Consider Paul Graham’s recent notes regarding “The Future of Web Startups,” (commented on by Fred Wilson) in which he notes that the startup system itself is undergoing seismic change as a result of dramatically lowered cost barriers: “It’s so cheap to start web startups that orders of magnitudes more will be started.” He continues:

If the number of startups increases dramatically, then the people whose job is to judge them are going to have to get better at it. I’m thinking particularly of investors and acquirers. We now get on the order of 1000 applications a year. What are we going to do if we get 10,000?

Surely, as discovery mechanisms such as The Funded continue to proliferate, the best venture firms will be overwhelmed with opportunities (as many already are).

I’d be surprised if venture investment experiences the massive boom that later stage private equity investment has in recent years. Certain startup costs, after all, are dwindling. But I won’t be surprised if we see a massive influx of prospective investments. And that means better screening and, ironically given the high-class problem of greater deal flow, more competitive deals since they’ll tend to be more “shopped.” I’d also expect that as we develop more metadata around startup success and failure, quantitative analytics will better serve even early stage decisions.

Fred thinks a programmer will do. I’d bet we see more “quants” in the ranks.

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