

Venture Capitalists' Failure to Make Money is a Problem for Entrepreneurs - acangiano
http://www.openforum.com/idea-hub/topics/money/article/venture-capitalists-failure-to-make-money-is-a-problem-for-entrepreneurs-scott-shane

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axiom
A 4.3% return on the 5 year funds is quite low indeed.

I think the problem is that VCs aren't investing nearly enough in mobile
social music local search review aggregators.

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kokoito
> mobile social music local search review aggregators

Seriously?

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kokoito
Thou art jesting, I am sure of it.

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btilly
If all else were equal, I would agree. Less money to invest means less money
invested.

However the cost of doing a startup has also gone down. By more than the
availability of venture capital. Therefore more startups can get going. Also
companies like Facebook and Google have more willingness than companies had in
the past to buy small companies that otherwise might be looking for venture
capital.

When you put these factors in, it is not at all clear to me that the situation
is worse for entrepreneurs.

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todd101scout
Several people have remarked that this doesn't seem to be affecting technology
entrepreneurship much, which seems true from what I've seen of software
technology startups in my area. However, not being able to get funding
profoundly impacts other types of startups that have higher
initial/research/production costs: green energy, manufacturing, basically
anything that isn't just a website and iPhone app. And that's really a bad
thing, because it seems that far too many entrepreneurs are now going the cool
webapp/facebook plugin route because there's a seemingly high potential for
profit in the area. But honestly, we need non-software startups too, and for
that we need venture capital!

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richcollins
It's not a bad thing if they were bad investments to start with. Mal-
investment creates bubbles.

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blantonl
Lack of huge upfront $$ to cloud an idea's success is not a problem.

I think it is good for a CEO to start from scratch (relative term, but..),
since it teaches some important core business principles that many seems to be
oblivious to. Like, make more money than you spend. Immediately.

One of the things I really enjoy that comes out of 37Signals is their
Bootstrapped, Profitable, & Proud Blog.

Those posts hit the spot every time for me.

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sleight42
I admit that what follows is tangential to the post. However, as a freelance
developer who, of late, works for startups, I've been mulling this a great
deal.

Startups are acquiring money from somewhere. While VCs may be raising less
funds and funding fewer startups, the demand for technical hires is soaring!
In my particular areas of expertise, Ruby and Ruby on Rails, demand seems,
frankly insane.

So what's going on? If there's less VC money in play, unless people are
exiting the software development market faster than new people are coming in,
one would expect that we software developers would be suffering employment
issues like the rest of the US.

And yet I know extremely few Ruby on Rails developers who are wanting for
work.

Is it perhaps that my perspective is limited? I know a fairly large group of
developers. The only ones who are looking for working (and we're always
looking for that next gig) are freelancers.

Is this the Google/Facebook "brain-drain" effect at work? That these megaliths
have hired so many of the talented people that, despite reduced VC funding,
startups are still suffering hiring issues?

What gives?

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bretpiatt
Before the majority of the investment went towards capital expenses to build
infrastructure. Now most of the invested capital goes towards salaries for the
development of the idea.

If the idea is successful then cloud computing is utilized to grow the
business. If sufficient scale is reached then you'll see companies take large
late rounds to build their own data centers and infrastructure out (such as
Zynga and Facebook).

So while total invested dollars are down, the cost to invest is down
significantly and "big money" doesn't need to be spent until you know you have
a success. VCs are poised to make much better returns over the next decade if
they manage their funds correctly.

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sleight42
Ah, thanks. I hadn't considered just how much cheaper cloud computing is
making starting a business -- even though I've actually experienced same
myself. Excellent points!

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trotsky
It's not very surprising that new investment into funds would tick down a bit
in 2009, the year they are discussing. These investments aren't made on the
spur of the moment, and the planning period of 2008-2009 was dead in the
middle of the largest economic downturn in 80 years. All sorts of people took
money off the table while they watched to see what would happen. It's actually
more surprising that they point out various metrics that "hadn't been this
low" since 99/97 etc - those were of course grand days for venture
capitalists.

The article notes an uptick in 2010. With all of the stories about money
chasing deals, big early valuations and term sheets being brought to first
meetings, I'd bet that uptick is probably a bit more than slight.

The effect of individuals bypassing funds and investing directly in early
rounds shouldn't be overlooked. The article is very dismissive of the
practice, but it is taking its queues from research done by an association
with venture capital in it's name...

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mycroftiv
The majority of the statistical data used to support the article's thesis is
from 2009. The effects of the financial crisis of 2008 obviously had a major
impact on investment decisions and results. If we choose a different metric
for how to measure the opportunities for entrepreneurs, real world economic
potential, the ongoing growth trends of social networking services, new
internet based businesses like Groupon, and the explosion of mobile device app
markets demonstrate that tech sector investments still have massive upside
potential.

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_delirium
The "angel investors won't make up the slack" part wasn't totally convincing.
It might be true, but quoting average investment by a single angel versus a
single VC isn't really the important number. It'd be more convincing to see
aggregate figures: total VC dollars are down $x billion, are angel dollars up
more or less than that amount? The article quotes figures for total VC
dollars, but none for total angel dollars.

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OstiaAntica
Congress badly damaged public capital markets with Sarbanes Oxley, which is
stifling the most important exit avenue for startups-- the IPO.

