Last September I wrote a post outlining my view of the venture capital industry: increasingly evolving like the beer industry as it continues to mature.  Large VC firms resemble Budweiser-type macrobrews, competing based on scale and brand with a standardized product across multiple geographies, sectors, and stages.  And much like the emergence of microbreweries specializing in craft beer, new Micro VCs (disclosure: like my own firm NextView Ventures) are thriving by specializing along at least one or more of these three dimensions (geo, sector, stage) with a unique offering for a specific subset of entrepreneurs.

It’s interesting to take step back and look what’s transpired in the year since that post.  I hypothesized that, “Perhaps a contrarian statement in this environment: but even though there’s been a dip in fund size due to broad economic factors and LP appetite, it wouldn’t surprise me if the truly top firms raise even larger funds over the coming decade.”  And it’s already happening… heritage firms have indeed raised even larger funds.  Within the past twelve months, we’ve seen Bessemer raise a $1.6B fund, Greylock expand its fund to $1B, and Accel raise $1.35B across two funds.  Hardly sounds like the death of the VC industry predicted by so many.  But these are indeed multi sector, multi-geo, and multi-stage firms with long-standing LPs who are confident in their abilities as an enduring franchise to sustain elite performance.

On the Micro side, we’ve seen numerous first- or second-time specialized funds close as well, like Pivot North, Thrive, and Freestyle… just to name a few.  All of these funds were raised despite the number of firms raising VC funds going down and overall dollars going into the asset class dropping.  So what’s going on?  Who’s losing out?   The answer is that mid-sized VC funds that don’t have the scale and brand to compete broadly, but also don’t have a focused and distinct strategy, message, and offering.  These firms are caught in the middle without much taste, just like Genesee in the beer market.

I believe that we’re only the beginning of the new wave of emerging firms (and those existing ones retrenching and repositioning towards) taking a specialized offering approach.  Those venture firms firms caught in the middle without the scale of a large firm and without the focused strategy of a Micro will continue to wane.

But if the VC market is really resembling the beer market, what does that mean for the customers, entrepreneurs?

• More brewers = more sources of capital.  Especially at the seed stage, because there are lower barriers to entry for a new firm with a seed stage strategy (because of capital requirements to raise mid-/late- stage specialized fund), a plethora of new firms will continue to be founded.  All of that choice becomes a double-edged sword for entrepreneurs, but in the end is of course net positive.  Founders benefit of having more funding options is certainly preferable, but there is a substantial onus on entrepreneurs to navigate an increasingly crowded and clouded landscape.  While social media has brought greater transparency to many aspects of the VC business, it’s still a relationship-driven and moderately opaque industry.
• Local brewers = geography matters.  As macrobrew VCs are increasingly spending time in multiple geographies (separate from their HQs) there is real potential to differentiate along knowing that you can actually sit down and see your VC face to face.  For some that’s important, but for some that’s a negative.  Just as some people here in Boston prefer drinking Cambridge Brewing Company ale; others could care less it was brewed locally.
• Specialized brewers = increasingly specialized sectors will cut beyond just a broad domain focus.  Big Data, mobile, cloud-only are all dedicated sub-sector funds examples I know of in the IT space.  Think of it as a hoppy IPA brewery vs. one which focuses on American Ales.  How much of a benefit is it to have your mobile company backed by a firm which only does mobile?  They’ll certainly know the ecosystem and be able to share learnings and network across the portfolio.
• What’s pouring = individual partners matter.  Each brewery has its own brews, and each firm has its own people.  Individuals will matter just as much as the firms themselves because of their efforts to make a distinction from the often faceless macrobrews.  Personality fit has always been important, and this dimension will become increasingly a factor on where the best entrepreneurs turn to for their capital.
• Can’t try every beer = paradoxically, reputation and word-of-mouth will matter more.  Even with greater transparency in online, with the abundance of choice, people will look to referrals.  Discovery of the right potential venture firm that will serve as a good fit becomes a harder problem because of the sheer number of options available.  When you only had a few beer choices, you tried them all; now you’ll ask your friends (with similar preferences) what they like.

Whether buying a whole keg or just a single draft beer – raising a large round or only a seed round, the VC landscape is definitely changing dramatically for entrepreneurs.  However, the difference is that with a beer you can always select another next time, but your VC you’re stuck with for a quite a while.