The Idea Dude

CONNECTING THE DOTS ONE AT A TIME

Monday, July 28, 2008

Entrepreneurial communism, an oxymoron

Robert Scoble has an article about the Silicon Valley VC disease. His observation is that venture capitalists are only interested in investing in companies that potentially can make lots of money in a short period of time i.e. 1-3 years instead of 10 years. They also want you to develop solutions for broad platforms instead of narrow niches because logic says the broader the market the better your chances of making more money.

I've seen the coin from both sides. Firstly in defence of the VC. They are not charities and their number one priority is to invest where they see the biggest return in the shortest period of time. Like it or not, that just makes plain business sense. Secondly, the good VCs get involved with their companies, many of them have been successful in the their own careers. So it only makes sense that they help you grow your business from within and externally.

The economics of focus. For the VC it's about focus, if you invest $100k in 100 companies, you're no better than a bank. If you invest $1 million in 10 companies, you can spend your time figuring out how to scale them. So it makes sense for them to spend big and focus rather than lots of little investment and have no time for you.

The need to go big. Despite best intentions and due diligence, the long tail concept applies equally well to VCs. i.e. if you have 10 investments, it is likely that 1 or 2 will hit it out the park, 2-3 will linger around and eventually make you money and the last 5 will either die or dilute you with subsequent rounds that it might as well be dead from an investment point of view. Given those odds, it's no wonder they spend most of their time trying to figure out which is going to be the home run.

Angels of mercy. For small startups who needs $100k to $500k to bootstrap their companies their only recourse is to look for angel funding. It's always been this way. Angels are usually people who have money to invest, do it in smaller amounts and often add no other value to your business than the money they contribute. They do less due diligence, ask less questions and take less equity. Unfortunately, the number of savvy angels have substantially dropped due in part to bad experiences during the dotcom era.

Incubators, the middle ground. Another source would be incubators. They typically invest enough to bootstrap your company, supply you with business development/marketing resources and even office space. The caveat is for taking an early stage risk they demand 50% or more of your company for very little money invested. The decision you then have to make is it better to realize your dream on someone else's coin or perhaps not at all.

The bottom line is being an entrepreneur is tough. Being a new one without rich relatives or a deep Roledex is even tougher. You wake up every night wondering where you're next meal is coming from and you eventually start looking into the mirror questioning whether you're not just chasing windmills at the expense of your family. Then you spend tons of time chasing reluctant VCs instead of developing your application. Finally, you start doing consulting and ad hoc work to pay the bills which is better than chasing VCs but you're no better off because you're taking precious time away from your startup idea. Which by the way is starting lose it's lustre as the world moves on or worse still some other startup who manages to land a million dollars muscles in your turf.

As they say, Caveat Emptor. Let the buyer beware

BTW: Only the rich will tell you that having too much money is a bad thing.

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