PG is spoiling us with great articles this month. Sort of like early Christmas presents.
Could VC be a Casualty of the Recession?
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Re: Could VC be a Casualty of the Recession?
#12Wealth is created when people take existing resources and transform them into something of higher value. Money is simply one very liquid type of input that a creative entrepreneur can use to create wealth.
If the marginal value of more investor capital to web entrepreneurs falls below the cost of acquiring and managing investors, then predictably web entrepreneurs will stop seeking capital. A more interesting insight, though, is that long before things get to that point, smart investors should be seeking to deploy their capital to ventures that can actually use the money to produce a better return. If capital is no longer the limiting reagent in web startups, then the money should go to places where money is the limiting reagent, and consequently has a higher value.
It's worth noting that Kleiner Perkins, as one data point, got out of the web startup business some time ago and has been investing in energy and biotech.
Re: Could VC be a Casualty of the Recession?
#13I would like to believe Paul's thesis, but in the back of my mind, why do I get the feeling "He is trying to scare investors into putting money"?! Seriously, I think over-supply of start-ups will crash prices. Yes, there is no limit to wealth creation, but even so, it is easy to upper-bound wealth creation over, say, the next 5 years. We can say with confidence there won't be more than, say, $10 billion worth of web…
If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town. And incidentally, I don't see why it's easy to upper bound wealth creation over any time period. If everyone woke up tomorrow and started working twice as hard, what would limit their output?
Why would you want later stage investors to drop out? You have early, cheap equity; don't later stage investors reset the valuation and give you a shot at cashing out if you want? (I really don't know, I'm actually asking).
Re: Could VC be a Casualty of the Recession?
#14The startup I work for just hit profitability and we're basically giving up on funding. The offers that we were getting weren't good enough. We'll grow slower, but we won't get dilution unless it's really worth it. What I'm curious about is that I thought the purpose of VC was not just to stay in business, but to grow fast . I'm pretty sure PG said in a previous essay or comment that if you skip out on VC and someone…
That's an excellent question. Begs these questions:
How much speed does the investment buy you? How much is speed really necessary?
Take the viaweb example: Supposedly, their advantage was in being first. A 6 month head start was a great thing to have when the concept of an online shop was 3 yrs old, the concept of an online shop builder 2 years old & the concept of an online online shop builder 1 year old.
But was it such an advantage? Sure it was from viaweb's perspective. That may have been what allowed them to sell. But what did Yahoo (the buyer) gain from this extra 6 months?
There are still companies making & selling online shop builders of various sorts. They are still largely built by startups. A 6 month head start is virtually meaningless in that market. Yahoo stores is older then any of the players, & it doesn't stand out really. It's a player with a piece of the pie in a pie industry.
Yahoo search on the other hand could have used a 6 month head start. If Google had left them a couple of years to realise they were losing search share, realise how important that was & do something about it, they mightn't have to sit in fear of a hostile takeover.
What am I saying? I think I'm saying that from the early perspective, it's difficult to know if moving first is important. Since when it is important, it is very important, acquires will buy early leaders so the problem is theirs not founders'.
On the other hand, I think it seems likely that the winner take most market is not going to remain the default target. That changes the game. If it's 1997 & you are building an online shop builder to be a serious player with a serious slither of the market in 2017, you can afford a six month break. If you expect a winner to be declared in 18 months, you need any speed available.
The catch 22 is: If speed isn't that critical, you need a different advantage against big companies. But then I think there is one somewhere. Most online shops are not made by huge companies.
Re: Could VC be a Casualty of the Recession?
#15I would like to believe Paul's thesis, but in the back of my mind, why do I get the feeling "He is trying to scare investors into putting money"?! Seriously, I think over-supply of start-ups will crash prices. Yes, there is no limit to wealth creation, but even so, it is easy to upper-bound wealth creation over, say, the next 5 years. We can say with confidence there won't be more than, say, $10 billion worth of web…
Why are you focusing on acquisitions? There are profitable companies that remain private, like 37signals (plus ones you never hear about because there's no point in talking about how much money you make) and also IPO, which is rare but potentially huge. Google alone is worth $86B, at that IPO was only 4 years ago, so your "$10B in the past 5 years" number is clearly incomplete.
If your thesis is correct, then these are really the ones that need focusing on. If the world is about to be be bombarded with startups, they can't all be bought or go to IPO.
The remaining startups will need to find a middle ground of some sort.
Re: Could VC be a Casualty of the Recession?
#16[deleted]
Re: Could VC be a Casualty of the Recession?
#17It sounds overly optimistic.
Why a total amount of money spent online should increase? More and more players are competing for the same or diminishing pie slice.
Google can buy only so many startups after all.
Re: Could VC be a Casualty of the Recession?
#18This is an interesting perspective, but it seems to be (potentially) true of one class of startup, but there are many others, requiring much large amounts of money to start, that will still rely on VC funding.
Software startups, specifically web startups, have been a favorite of VCs (for good reasons). If those startups no longer seek VC funding, will it trigger a renaissance in funding for other startup classes (e.g. semiconductors or hardware)?
Re: Could VC be a Casualty of the Recession?
#19Completely, totally agree. I was just discussing this today with my business partner; I think that many people won't even know what to do with extra money if it is given to them. That's never happened before - there's always been the "well, we could use more servers" or "well, we could always hire more engineers" argument. Today, I think a lot of people are beginning to realize that 1) if you engineer your applicatio…
Interesting. I wonder if, 10 years from now, VC will simply be high tech private equity?
I don't think this is likely, because turning a kind-of-flawed tech business into a good tech business usually (though not always) requires a lot of technical work. I could imagine a collaboration between VCs and hackers, though, or just a group of savvy hackers, taking on this kind of role. Basically a larger-scale version of going around to my friends and saying "I think doing X would make your company better and I'll do it for 10%."
Re: Could VC be a Casualty of the Recession?
#20A lot of people want to start companies now, VC or no VC. But IT and development jobs remain relatively abundant; someone who can make a credible run at a startup can also land a new job in less than a month. That may not remain the case, and job security could constrict the flow of talent into crapshoot startups.