Tuesday, March 04, 2003

Mom-and-Pop vs VCs

Arnold Kling comments on my recent post regarding venture capitalists' reluctance to go up against Mom-and-Pop businesses. He notes "In fact, mom-and-pop businesses typically are in markets with low ambiguity and VC's go into markets with high ambiguity, so they don't go up against one another."

This may certainly have been true in the go-go 90s when most people first heard of the term "venture capital" and associated it with speculative technology ventures, but it is not true of the VC business in general, many parts of which have not (historically) invested in technology. Staples, for example, was venture funded, as was the Sports Authority, Starbucks, and Home Depot. VCs also back old folks homes, schools, speciality medical clinics, rehabilitation camps for wayward youths, and various other ideas that essentially take a fragmented microregional business and scale it nationwide. When people talk about American competitive advantage coming from a large domestic market, in part they are thinking about the ability to experiment with scaling small businesses to US size first before trying to take them international. It's tough for a guy in Luxembourg to come up with Staples.

I don't know if Arnold would characterize stationary, athletic equipment, coffee, and lumber as being "high ambiguity" but they were all markets where VCs decided to go up against Mom-and-Pop businesses and fund startups.


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