Fred Wilson recently wrote that there are now two venture capital industries: One software-based, and one that is capital intensive. He argues that the former has gone capital efficient, and the latter (including "cleantech, biotech and other capital intensive tech businesses") that "operates largely the same way it has operated for the past twenty or thirty years". It's a good post, as with many of his thoughts, well worth reading if you haven't seen it already. He mentions forthcoming data that should be interesting to see.

I think he's right. There really are two divergent strategies in venture capital right now. The one goes for as little cashburn and as quick an exit as possible. The other looks to put money into leading companies, position them as winners, and then put as much capital as possible behind those winners.

I do think Fred misses an important point, however, when he paints cleantech with the broad brush of implying it's all about that capital-intensive strategy. Certainly there are plenty of high profile examples where such an implication is indeed correct! But as Jeff Bussgang then wrote in another good column (not just good because it mentions Digital Lumens, one of my portfolio companies, but because of the basic argument), it's also possible to invest in capital-efficient, non-software startups in cleantech... If management and Board are willing to take it that route.

I think of it more like the divergence in semiconductor investing. At first all semico investments needed to be pretty capital intensive, because they required building out specialized fabs. But as the industry matured, it became possible to invest in "fabless" companies that focused instead on the core innovation, product design and market execution. Such choices are available across sectors.

Perhaps this is why data provided by CBInsights, in response to Fred's column, don't really seem to support the idea that software plays are diverging strongly in their capital intensity versus other categories. While software does show itself to be less capital intensive in general, it's not like that sector's headed one way while the others head the other way.

Fred tweeted me that he's got different data that will look at it in a different way, which could be right. But my strong suspicion is that he's identified a correct pattern -- a divergence of venture capital strategies -- but incorrectly applied it sectorally. I suspect instead that these two investment models can be found WITHIN many of these sectors, including cleantech. I met with a GP the other day who has a strategy of investing in capital-efficient life sciences tools, for example, rather than capital-intensive drug development efforts. I meet cleantech GPs all the time who target capital efficient plays within cleantech (and a few of them actually seem to mean it). So I don't think it's fair to say that software VCs are a new breed and VCs in other sectors are tackling an old model AS A RULE. But to be fair, Fred's right that there really are a lot of VCs in cleantech who (especially up to 2008) were indeed trying to apply that old-school model to the sector. And the results of such efforts are very unclear to date...

But what I think might be interesting to take a look at would be fund size as the causal factor for the schism Fred's identified. I don't know how to prove chicken or egg. But I strongly suspect that the really big funds that have done some cleantech (among multiple other sectors) are the ones most likely to invest in the capital-intensive models. Perhaps it's just out of necessity, but VCs with funds <$200M really do seem to do a better job of staying true to the capital-efficient investment model Fred is espousing, across sectors (including cleantech). And meanwhile I've had a generalist VC with a fund >$500M tell me his fund was explicitly looking for capital intensive opportunities (note: this was in 2008).

I can't say for sure, but I bet fund size is a more important determinant of which of the "two VCs" you are, instead of sector.