Venture Capital and the Birthrate Problem

Last weekend, I read Fred Wilson’s post on the expanding birthrate of web startups and had a few thoughts on web startups and the nature of venture capital markets that I wanted to flesh out. 

Web startups are easy to bootstrap and easy to pop up with little to no starting capital. But this is not totally unique to web startups. Granted, you’re not starting a new airline this easily, but many business (service based) are as easy to start and light on capital needs, but starting a HVAC or repair business is not as sexy as starting a web startup. Not surprisingly, I know more successful non-web startup entrepreneurs than I know in the web space, even though I know more total entrepreneurs in the web space. The sexiness of the web startup world is based on the misconception that it is easy. Entrepreneurs see crazy evaluations on Facebook, Twitter, etc. and think it is easy riches. Notably, most of these entrepreneurs fail. Evolution works in capitalism and capital investment in the form of VC/seed money lubes this process pretty well. 

The real thought provoking part of Fred’s comments are around the current status of the VC markets. This is the area I am most concerned with. One of his last points is this:

The venture capital business is contracting. There are less VC funds than there were a few years ago. And there will be fewer in a few more years. And the birthrate of web startups is expanding. That is the challenge we all face.

The alternative investment side of the capital markets gets hurt faster and more substantially when we have the market upheaval like we have the last few years. We are protectionists deep down inside and when things get scary, we like to pull back into our little turtle shells. This hurts the investment managers and advisors that play this important parenting roll for startups. 

This may be a newer occurrence for the web startup space, but startups in more mature spaces have been to this rodeo before. I think this is why they are less reliant on VC money for startup and growth. They bootstrap more and use more traditional lending markets and cash flow to grow businesses. This is a good thing for web startups to learn. It will make the quality offerings come to market with much better backbones and slow the innovation cycle down a little. While I like big innovation cycles and dynamic organizations, I think the web space needs a little refinement in this area.

There has to be a renewed interested in setting up startup funds, but the economics and structures have to change a little before this happens on a grand scale again.

As a parting shot, I think this is a great way of thinking about VC/seed investment:

I like to think of the venture capital business like parenting. When I invest in a company, I am committing to the care and feeding of the company until cash flow break even (the startup equivalent of adulthood). That care and feeding includes the decision to call it quits and give up on the project sometimes, but honestly that doesn’t happen that much in our portfolios.

So when I look at this expanding birthrate, I think “who is going to house, feed, school, and send all these kids to college?” 

These are advisory and naturing partnerships at the very core. If you are looking for capital, look to people with this ethic.

Launches

Seems like Fall is new venture launch time in my world. Last fall was the launch of 20/20 Fitness Centers and Mecafresh, and we have four new launches planned for this fall and one expansion project. More to come on those, but I wanted to take a look back at last year’s round on the eve of this new round and maybe start to flesh out some thoughts.

 

First, I give myself a solid C- on last year’s round. There are a lot of reasons for this and the problems started with the idea excitement from the very beginning. Ideas are fun and sexy, no doubt about it. They hit you like bolts of lighting and run through you with the same force. At least for me, I get energized by the dynamic movements and eternal problem solving that comes from getting ideas to execution. I knew this excitement and passion for new deals had to be carefully monitored but my hubris in these two areas got the best of me more than once during these launches. The projects were two Mecafresh locations, Evanston, IL and Stuart, FL, and a new gym concept, 20/20 Fitness Centers in Stuart, FL.

 

Since these two openings, I have spent a good deal of time thinking and working through idea flow, execution, and partnerships. These are the key areas where my solid A ability got translated into a solid C- execution.  My frustration with this poor showing turned into a desire to learn from the many mistakes with these two projects and I realized these mistakes aren’t all that uncommon. In fact, I would venture to say they are the basis for most mistakes with launches. There is also no shortage of books/thoughts on these three areas. Don’t believe me? Search Amazon. I have read though many of them and found two I like on idea flow and partnerships, but I find myself still a little wanting on the topic of execution. 

 

Over the next few posts, I am going to hash out some of these failures and some of the things I am going to change as this next round of launches start rolling out.


No More Testing….

After a few weeks of ‘testing’ and a few years taking a break from writing in this form, it is time to get back up and running here. The goal here is to have a space to work out ideas around entrepreneurship, especially related to high innovation cycle and social enterprising businesses, and to talk about organizational and investment issues and strategies. Since my entrepreneurial background is around the areas of asset management and more traditional entrepreneurship (real estate, restaurants, and the like), this is a space to air out some thoughts on these newer forms of investing as I dive into them. I have made a few seed/angel investments and been heavily involved in start-ups and advising for the last few years. This has given me just enough experience to be dangerous and just enough success to have the taste of blood in my mouth.

 

Traditional investing in the more established and liquid asset markets has become too over run with investors, too removed from the operations of the underlying asset, and too uncertain on the regulator side of the equation over the last few years. To be fair and accurate, it has become kind of boring. The operational side of putting ideas in action and executing is a lot more sexy these days. 

 

We started adding to the start-up investing side of the portfolio and digging into more operational roles and advising about five years ago. I wish I could say this has led to great success, but we are batting around 50/50 to date and have a few scars to show from our experiences. Since we obviously have a long way to go with this type of investing, I thought I would use this space to air out things we are learning from, things I am excited about, mistakes we have made, things our investments are struggling with, etc.

 

Also to be upfront, I hope this space welcomes a way to be introduced to other entrepreneurs, especially in the Southeast part of the US, so I can find other investment opportunities and new businesses to learn from and develop relationships with. Over the next few weeks, we will be adding more functionality to The Southerner Group website to help with this goal. This will give you a way to submit ideas and business models you are working on and looking for investment or advising.

 

I am not trying to create another time suck or put another thing on my plate that doesn’t need to be there with this blog. My goal is to post good thoughts and interesting observation once or twice a week on average. So keep the bar low, as to make sure you get over it, then raise the bar.

 

With that, off we go…