Obviously that's not what's going on and this behavior more a symptom of much lower costs to start a company and a large supply of low cost talent. Chris Dixon talks about entrepreneurs being smarter (perhaps true), but I think it's just with lower costs, and more diverse funding sources they have more options. Whether it's it's Austin, Boston or San Francisco, I can't walk 20 feet without seeing another early stage deal. In my neighborhood in San Francisco, social media, wireless/mobility and biotech in particular are all over the place. Each little back alley and pier is packed with startups. A couple thoughts on this:
- Things are not as active in traditional venture capital funds as many struggle to raise super sized funds and maintain the flow of fees. Angels and incubators, on the other hand, are exceedingly active. The failure rate will probably be 90% but with so many more deals out there, it means some promising new companies and maybe a new industry or two. If 10% win-- we are going to have a lot of interesting new businesses.
- What happens when all these companies start looking for subsequent rounds and all traditional sources are still working on their next fund? Many funds are changing focus quickly to adjust to the new environment and/or are not raising new funds. While some of these early stage deals will be capital efficient even in later stages, many will still need relatively large raises that angels and incubators just can't handle.
- While many businesses require a lot less capital to start, they don't require less capital to grow. If you don't have runway, you simply won't find out if you have a winning business or not. Usually, an early stage deal has to reinvent itself multiple times. You could and should stay small until you do that. Cash and a low burn give you the luxury of time to find your path to success. Once you've hit a mature burn, if you have shaky capital backing, it will be impossible or very difficult to focus on that opportunity and get a successful exit. I've seen companies with great potentially just tank if even one of their venture investors is unstable. Lower costs of starting/running a business means that you don't need as much cash to find your way in the wilderness but for most startups, you still need strong/confident investors supporting you.
- Seed investing is HARD and does not scale super well. It takes a lot of heavy lifting by management and the investors to bring in the right team and the right strategic deals where appropriate. These types of activities are time intensive and thus by their nature it's hard to do a ton of them. Some really famous seed investors use the shotgun approach. I am not a fan of this strategy and I am not 100% convinced the math works there. I think you have to have a decent strategy, stick to it, and adjust as needed.
- Early stage investing requires an ability to go from failure to failure without any measure of diminished hope or exuberance. To me that implies a lot of the ex-corp dev guys and lawyers who are now active seed investors may drop off. I've done corporate development--it's not the same $$#$# thing as venture investing. There is a huge learning curve. Not a lot of people have the ability to invest that way.
- Seed investing can be the most rewarding financially and otherwise. Seeing a company grow from no revenue to tens of millions is a great feeling. My relationships with teams I've invested with early on are like family as you are often in some pretty thick battles with them. So just to be clear- this post is not a knock on seed investing...far from it.
Overall I think it's a great trend and is promising for the economy, but what happens when all these companies grow up and need mature run rates of capital? Further, what are the more interesting themes in later stage deals? Here is a quick rundown of the top 7 themes. Off the top of my head:
- Broadband. The Telecom Reform Act unleashed a massive investment boom and a subsequent bust. Right now we don't have enough competition in broadband and too much spectrum is tied up warehoused in too few hands. It's my bet that Congress and the FCC will take steps to put more spectrum in the hands of new entrants. Wireless broadband pipes needs 2 -3 national licenses with perhaps 1-2 regional competitors in each market. The FCC can make all the new regulations it wants or launch new investigations into IPhone exclusivity but without real competition nothing will change. We let too many carriers merge without thinking through the competitive ramifications.
- Genetics and impact on targeted drug development. Personalized health care. I love this stuff and it has the potential to not only drive down health costs but serve a role in preventive medicine and more effective treatments
- Health Care. Cost Management and regulation compliance. We need to cut health care spending by 20% at least on a per capita basis. This is going to require an investment in information technology and
- Energy/Utilities. Unforeseen problems here could create opportunities. If the country makes large changes in the way it gets its energy and as IT penetrates old sectors, this could mean new business opportunities down stream.
- Telecom Equipment. This sector used to be a high flyer in the 1990s. It's taken a decade to digest over investment and for data growth to catch up. What goes aroudn comes round.
- Mobile/Social Media. Advertising, location based services, gaming. Old media converting to new as the cost of new development for old media is still way too high. There are a lot of strong players here already but there are always 2-3 changes in leadership as innovation continues. Many segments still have no leaders and are still trying to establish a business model. There are still quite a few things technology still has not delivered here-- still plenty of room. Massive amounts of segments here still have not been penetrated and plenty of time to go at them.
- The Cloud. Long term trend and has been called a lot of different things. Whatever nomenclature you want to use here, I expect the trend to to persist.
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