Venture Capital in Decline

I saw a couple of pretty interesting stories from Business Insider’s Silicon Valley Insider (SAI) section… and they don’t paint a pretty picture for the near-term future of venture capital (VC). These VC companies like to pony up large sums of cash to buy up new business start ups that seem to have a good shot at fast growth and profitability. But apparently, it is a lot easier to fall for hype than it is to find a company with a good long term outlook.

VC Industry Stats:

According to the first article, there are less than half as many VC firms as there were in 2007. At the height of the last speculative bubble, before everyone got worried about housing & construction & derivatives, there were 1,000 such venture capital companies looking to invest. Today, there are about 400 and many of them aren’t taking on new projects so much as they’re managing the assets they already own. As an upside, they point to a few VC firms that have made a fortune (or are “about to!”) in highly valued web businesses like Facebook and Groupon. On the other hand, more and more people are starting to wonder if this really is the last call for the web bubble version 2.0.

Don’t bet against Google

Later in the day, Business Insider posted another article that kind of clarifies exactly why so many of these ventures failed to pan out. The anecdote in question relates to a guy who claimed that Youtube was doomed – and proceeded to raise $12 million to build a competitor. Except Youtube isn’t doomed. By adding more ads to more videos, they’ve actually done quite well in the last few years since Google has taken over.

This VC funded competitor, Fliqz.com, has finally been sold off to another web video company at a price range that isn’t much higher than the original $12 million they had to work with. Who would have imagined that people didn’t want to pay money for video hosting, especially when there was a completely free and already popular alternative available? Apparently, not the guys at Fliqz, not the VCs that dropped eight figures on the plan, and maybe not the guys at VBrick who shelled out their own $12-17 million to buy it up.

Rich and bureaucratic vs lean and hungry

So do you need money to start up a web business?  It can help, but it can bring you problems too.  In fact, I think I remember a rich and famous guy who once said “Mo money, mo problems,” shortly before being gunned down in a jealous or vengeful rage.

While easy VC cash can help you invest in some of the hardware and labor you need to build a big company, it can also stifle some of the creative process by demanding conformity to investor standards.  It also creates a false sense of security.  When an individual entrepreneur starts running out of money, they don’t have much choice but to cut costs and double down on building revenue.  When a VC funded start up faces a similar situation, there’s a lingering temptation to ask someone for more money.  In fact, some people even call these investors “angels” as if there was something magical and holy about the checks they write.  Nope:  they want their money back and then some, and eventually this will be a big problem for a company that can’t see passed the up front cash.

Stop dreaming of the IT lottery

Yeah yeah yeah, there are some billionaires out there with stories that sound too good to be true.  If you’re trying to recreate that though, don’t get too attached to the idea of becoming an instant success on the back of someone else’s cash.  It is hard enough to get a .com to reach profitability, and having huge loan payments or split ownership interests isn’t going to make that any easier.

I say:  Stay small, stay flexible, and try to stay at least a few steps ahead of the crowd.

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