One of our investors is updating his POV on the VC environment and reached out for my 2 cents. After thinking about it, I would describe my observations of VC with this headline: “steady as she goes.” Here’s why.

Intra-firm dynamics have stabilized. I think the firms that needed to restructure pretty much have, as I’m not hearing much new anxiety from peers. In some situations, firms have shut down offices and exited certain vertical sectors. In some cases, senior partners were pushed out, and in other cases, they decided to turn over the reigns to the next generation.

I’ve blogged in the past here about how a legal entity called a “management company,” which is separate from a firm’s fund and partnership structures, really controls a VC firm. A handful of individuals tends to dominate a management company and the ensuing economics of a firm.

Restructuring has usually meant that other individuals have been phased into a management company. And, senior partners have negotiated a “tail” of fees in exchange for letting others into the management company.

The roles for various funding players are now well-known. I think entrepreneurs have become very informed. They know the pros and cons between a micro-VC (invest in one round only)  and a life-cycle VC (who invests in every round), between a new VC brand and an established one, between a convertible note and a priced equity round, between working with an Associate vs. a Partner vs. a Management Company member, etc. They also seem to know which VC firms have fresh money, which ones have just a few shots on goal left, and which ones are tapped out.

So, entrepreneurs know to whom they should go for a seed round vs. a Series A vs. a later-stage round. For seed and Series A rounds, which is the entry point 95%+ of the time for Kepha, I’m finding that it has become a very streamlined set of players. For seed rounds, we usually see some micro-VCs, angels, ourselves and two other Boston-based firms.

For Series A rounds, it is also a focused group. I’ve blogged in the past (click here) that, IMO, there are only 15 individual partners based in Boston who have the capital to price Series A Internet/software/tech rounds. It is even tighter when you break that group down by sector, as some focus mostly on B2B whilst others do B2C mostly. So, this group of 15 is seeing very good in-bound flow right now.

In addition, I’m not seeing many new VC firms entering the market. I get the sense from LPs that they’ve already picked which established firms and which new entrants they want to back. So, it is a stable group of players right now.

It is a two-tiered market. I’m seeing fewer financings get done, but that firms are willing to “pay up” for quality, even in the seed and Series A rounds. National data from Pitchbook seems to imply the same (their recent report is here). I’ve seen this at other times in the cycle when there’s a “flight to quality,” which means entrepreneurs in the perceived top tier are getting great terms and everyone else is struggling to raise money.

It certainly isn’t fair, as perception of quality early on is nebulous at best, but that’s the market reality. And, I don’t see this trend changing much unless there’s another global crisis or the IPO window becomes more robust.

So, what does all mean for VCs?

I cannot speak for the industry, but Eric, Ed and I talk about it a lot. And, this what we think for our firm: investment “alpha” has shifted to management.

Alpha is what all investors seek. You can get higher returns by taking on more risk, but alpha denotes a manager’s ability to generate returns in excess of a given level of risk. When I entered the VC business in 1998, for example, sourcing seemed to be a big source of alpha. VCs were hard to track down, and you either wrote letters to them or received a referral to them via a portfolio company. Inbound flow therefore could be somewhat proprietary.

Social media and blogging have completely changed all that. I think entrepreneurs can pretty much get to any VC they want. I don’t think there’s alpha there for the VC as a result.

In fact, in the “VC value chain” of sourcing, picking, winning and managing opportunities, I think alpha is in the managing part. I think it’s fairly easy to source and pick the investments you want. It will always take skill to beat out other VC firms, but when everything is pretty much auctioned, spreads in returns will come largely from managing an investment.

My partner Eric calls this “company building,” and there’s a myriad of difficult decisions board members face when progress is slow for a start-up. Some start-ups catch lightning right away, but the vast majority need to adjust/pivot/retrench, and this is where business judgment for the VC really needs to come and play.

Sometimes, your co-investor gives up and you have to decide whether to keep funding the company alone. Sometimes, the market for that start-up is really slow, and you need to decide how much patience you’re willing to show. Sometimes, a co-founder leaves, and you have to wonder why. Sometimes, a founder has a glaring weakness about which he/she is unaware, and it’s your job as the VC to be a coach without alienating that person.

I could go on.

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So, those are my 2 cents. After a great deal of change and tumult, this now feels like a period of stability for the VC industry. Things of course could be better, but they can certainly be a lot worse. IMO, portfolio returns will come not from sourcing/picking/winning, but from helping entrepreneurs succeed.

Steady as she goes.