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.

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