UPDATED 00:21 EDT / JANUARY 22 2017

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VC Greg Sands: Cloud disruption, venture turmoil and Trump spell tumultuous 2017 for entrepreneurs

Like many other people in Silicon Valley on Inauguration Day Friday, Greg Sands found himself wondering with no small amount of trepidation about what kind of economy we’ll see under President Trump.

And it wasn’t just because Sands, founder and managing partner of the early-stage venture capital firm Costanoa Ventures in Palo Alto, California, was an enthusiastic supporter of Hillary Clinton. Beyond being “personally disappointed,” he said in a conversation on SiliconANGLE Media’s Silicon Valley Friday Show, Trump’s victory presents new uncertainties and risks for Silicon Valley and the entrepreneurs who drive it.

Sands sees some potential opportunities, such as tax changes that could encourage repatriation of tens of billions of dollars held overseas by large tech companies, which “could lead to both broader investment in ongoing technology and potentially more M&A.” But he also sees continuing divides on issues such as immigration and trade policy, not to mention the widening gap between the 1 percent, often personified by Silicon Valley tech leaders and New York financiers, and the rest of the country. “The election highlights the fact that the economy is really fragmented,” he said.

That fragmented economy has huge implications for Silicon Valley and the entrepreneurs, especially on top of other simmering shifts in the venture capital that funds them and a technology landscape getting both disrupted and energized by the cloud and other sweeping trends. Our featured guest this week, Sands ranged over all those coming challenges with John Furrier, host of the Silicon Valley Friday Show and co-chief executive of SiliconANGLE Media.

Hoping for a steady hand

On the political front, Sands, who hosted a fundraiser for Clinton at his Palo Alto home, said he and others thought she understood the issues the Valley cares about and could continue to make further strides in the next four years. “She spoke extemporaneously for 60 minutes and it was a policy wonk speech. For me and for the Silicon Valley audience, that works really, really well, right?” he said.

That’s one reason why, he said, “the election was a real shock.” Sands conceded that “that same speech and that same orientation doesn’t necessarily play all that well throughout the country.” Ultimately, Sands, said the tech industry is looking for something pretty simple from the government: “All Silicon Valley wants is a steady hand.”

Politics’s impact on the economy may be the biggest uncertainty today for entrepreneurs, but it’s hardly the only one, Sands said. Another is Silicon Valley itself, a relatively wealthy enclave that has come under criticism for being out of touch with Middle America. Sands acknowledged that there’s a part of the Valley that feeds that belief by playing fast and loose with rules and simply trying to make a buck. (Think Theranos Inc. and its misleading blood tests.) “There are extreme examples of it and frankly I’m embarrassed by them,” he said.

But despite many other examples, Sands contended that’s a small minority of Valley players. “Theranos is a company that did not withstand the scrutiny of serious venture capitalists — all the serious venture capitalists turned it down,” he noted. “Enron wasn’t here, WorldCom wasn’t here in the scheme of things.”

Beyond the bad apples, he said, “there are bunch of people that are serious, substantive, smart, hard working, care deeply about their community, care deeply about the world, and are trying to make things they care about using real complicated hard technology. That’s where I live, that’s where we live.”

Venture megafunds or boutiques?

Another challenge for entrepreneurs today is understanding the changing nature of venture capital, which Furrier noted was following the pattern of other tech businesses that are integrating various products and services. “We saw hyper-convergence in storage; HP just bought SimpliVity. In business school at Stanford, you see integrated engineering, business school programs, entrepreneurship integrating with this. Cell phones are now integrated with the computer; that’s called the iPhone.”

Now, he said, “Andreessen Horowitz has now vertically integrated Silicon Valley, kind of a stack, and brought everything in house,” including all manner of business services. Is that the new model for venture capital? Furrier asked. Sands noted that James Barksdale, former CEO when Sands worked at Netscape Communications Corp., used to say that there are two ways to make money in the world: bundling and unbundling.

“Andreessen Horowitz forced the hand of a bunch of the traditional firms,” prompting them to step up in a similar way, Sands said. “There wasn’t a question as to whether they would be great and give it their all, and they would think from first principles about what to do and how to do it.”

Still, he said it’s an open question whether mega-funds of more than a billion dollars, such as Andreessen Horowitz’s or New Enterprise Associates’, can sustain outsized returns its investors expect. “For anyone who has a billion dollar fund, [returning] four or five billion dollars is just hard to do,” he said. A $3 billion fund needs to return up to $12 billion — and there are precious few companies that can generate big enough returns to get the fund there. They also can’t pay as close attention to any one company if they have to invest all that money in many startups. “If you have a seed investment in a $1.5 billion fund, [you’re] not likely to get that much time and attention,” he said.

Not surprisingly, Sands contended that most entrepreneurs will do better with smaller VCs. Many VC firms, such as Costanoa, remain focused at the earlier stage, so the services they offer are more focused on young startups needing seed capital or no more than, say, $6 million for an initial Series A round. Costanoa also has two “operating” partners, Jim Wilson in sales and Martina Lauchengco in marketing, to help teams with finished products to get into the market and scale up faster. But the overall focus is on more intense support of early-stage startups.

Disruption and opportunity in cloud and AI

Not least, Sands, whose firm invests mainly in software-as-a-service and marketplace startups, laid out the challenges faced by traditional companies, and the opportunities entrepreneurs are seeing, thanks to the rise of cloud computing and artificial intelligence as prime drivers of the technology industry.

“The role that AI plays it is already transformational,” he said. “What has really happened is the proliferation of sensors and data, the rebuilding of the data stack so you can manage and handle all that data, and the creation of the compute capabilities in the cloud. That combination is actually what has unleashed AI because for the most part, better data trumps better algorithms.”

Furrier pointed out that the data center hardware and software that drove tech for the past couple of decades is “crumbling” in the face of the cloud and AI. On a recent Silicon Valley Friday Show, former Cisco Systems Inc. and Arista Networks Inc. executive Doug Gourlay lamented, “I spent my entire business working life building products that no one wants to buy anymore” because Amazon Web Services is providing them in the cloud.

“Amazon has completely run away with it,” Sands said. In fact, he sees a new ecosystem developing in Seattle as a result of the success of companies such as Amazon as well as Valley companies such as Tableau Software Inc. that have flocked to Seattle for talent, in a way that Microsoft with its singular dominance and loyal employees didn’t. “My expectation is that it’ll be a terrific startup and entrepreneurial market,” he said.

Still, Sands said potent competition from Microsoft Corp. with its Azure cloud and Google with its cloud is helping to create new ecosystems of developers and partners beyond just Amazon. “It’s good for the venture ecosystem, and the entrepreneurial ecosystem, for Google Cloud and Azure to be serious and legitimate competitors,” he said.

Here’s the full Jan. 20 Silicon Valley Friday Show, including (near the end) Sands’ surprise encounter with bomb-sniffing dogs invading his house:

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