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Summary:

The NVCA today released data that confirms what we’ve known for a while: without 1999’s fat exits, venture industry returns are suffering. As a result, capital will become scarce, which could make it the perfect time to change how we view technology startups.

The National Venture Capital Association today released data that confirms what we’ve known for a while: Without 1999’s fat exits, the venture industry is looking pretty tired, from a returns perspective. The chart below shows how much every dollar invested in a venture fund returned to its limited partners; for example, in 1996 every dollar invested generated 4.7 times that back to the LP.  The solution for perking up returns seems to be a smaller industry and smaller funds seeking to place smaller amounts of money into startups, but I think there’s more to this story. I think we need a new startup myth.

We’re already seeing the habits of successful entrepreneurs change as a result of it being a lot cheaper to start up a business and easier to connect to an audience. Maybe the ideal technology startup doesn’t need venture capital. Maybe it can be bootstrapped or backed by angels. Maybe the ideal technology startup isn’t really about making it big through an initial public offering. Maybe it’s about selling a compelling feature to a larger company and setting the agenda at a Google or a Microsoft or a Cisco. Or perhaps success could be determined by getting a huge share of the market, releasing a product that changes everything or building out a business that employs a lot of people in your hometown?

Many of the definitions of a successful entrepreneur in the technology community are tied deeply to an IPO or a fat exit. But if the new tech startup myth doesn’t require a venture capital funding, then success doesn’t have to be defined by a relatively rapid, huge exit. I see plenty of startups that are doing well take venture capital even when they don’t have to, fueled by this desire to get bigger, faster. They are buying into the myth and may end up pushing their business in a direction they didn’t want it to go. This isn’t bad, but it’s also internalizing a “truth” popularized back in the mid-90s when being a technology startup was synonymous with having venture backing.

Thanks to the rush of capital, that time frame also made that myth of tech success  through a huge IPO look far more achievable than it really is. So I wonder if we need to redefine what a technology startup looks like and how it can achieve success? The venture capital world measures success in money, but there are plenty of businesses and entrepreneurs who think money is only part of the reason to built out a business. Readers, what do you think?

  1. Maybe VCs should take a real risk and put up big money to tackle big issues instead of just playing it safe, haunting the margins?

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  2. Success is measured individually. See similar comments in the Music Business Is Alive post related to music startups, i.e. bands. RichardBauer.wordpress.com

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  3. If I am correct, this is mostly your issue as a publisher focused on the space. Most of us simply have to put our souls into it and work hard. The fact that 95% of businesses are gone after 5 years isn’t lost on us when we put our time, money and effort into projects. Frankly, I find it symptomatic of finance in general.

    While I am not starting another effort out of the goodness of my heart, at its very core I want to make the content I have created for 20 years in education better and make it useful in the classroom. This effort was alway my next one, but I sadly didn’t make the money I wanted on the last! But, tools survive and are useful here.

    Go for the low hanging fruit! It is easy and ready to smack the ground. Or, build something worthwhile. It’s your life. But, if you want to change the industry, how will you focus your reporting to make that appealing and valuable. Statements are so easy.

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  4. @Stacey,

    I think you’ve made some interesting assertions given the poor returns of venture capital to their limited partners. In my past, I was taught that high risk investing (VC & other forms of private equity) required proven sweat equity and business models. Both of these requirements seem lost to the VC community. Hence these results are to be expected and really aren’t that surprising.

    That said, bootstrapping should be a mandatory requirement BEFORE any VC investment in my opinion. I’d also add that VC’s need to place less emphasis on eyeballs, funding their friends, and funding startups that offer evolutionary features versus innovative solutions.

    My $.02,

    Best.

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  5. The software business has dramatically changed in the last year or two. A small shop now can have a large infrastructure at its disposal, if and when the customers arrive. But that doesn’t mean it’s become easier to make it through the 5-year mark.

    The noise level is becoming louder and louder, and making it through that noise is becoming harder by the day. That’s where connections (one thing that VC’s and Angels do have) and some PR money bring big advantages in getting things rolling and keeping the ball moving.

    I fear that soon Social Marketing costs will be taking up over 50% of a startups manpower and money very soon.

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  6. investing in the good’ol boys vc network days are over. the dismal returns are from bad bets, collusion and shell gaming the system. theres a lack of innovation/ip startups to invest in. not alot of game changers to invest in. internet and mobile digital media innovation has its limits. we are at an apex of innovation.
    -context is the new king. whomever can create the best Location Based Service Switchboard wins the game.

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  7. venture money may have returned a good ROI to investors, but it’s always been a sucker’s game for entrpreneurs. I can’t hedge through diversification over multiple investments of my time/energy the way a VC can do with her/his $. As a result, the risk/return profile never made sense for an individual entrepreneur, imho. Didn’t then, doesn’t now.

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  8. @Stacey,

    Having worked with startups in Austin since the 90s, I’ve seen both venture-backed, privately-funded, and self-funded. By far the ones where the founders are happiest are the self-funded. They have more freedom to choose the direction they want to go, plus they get to enjoy the reward if they are successful.

    The startups that have been taking this self-funding approach 1) build a smaller product up-front 2) focus on revenue as early as possible, and 3) iterate as they learn more. This process requires less VC money up front, helps prove the market, and makes the opportunity for securing VC in the future easier as they have a proven track record and sales.

    The downside is that founders have to wear more hats and often do more themselves or with outsourced help due to the lower up-front capital and need for more sweat equity. It seems that many founders prefer this trade off in exchange for full control of their startup, as we are seeing more choose this route over seeking VC funding.

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    1. What you describe is essentially the approach we are taking with Zavee, our social shopping startup. In our case the initial product is inherently fairly sophisticated but we avoided the temptation to gold-plate it. We also avoided the temptation to rush to market with a stripped-down version that might generate some revenues but would under-deliver to the customer. However, we are committed to starting small, learning as we grow (and vice versa) and remaining in control of our destiny.

      I would add that another consequence of being self-funded is the need for an exceptionally strong and committed team to support the founders, which we are fortunate to have at Zavee.

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      1. Ron,

        I agree – developing a strong team early is key, as these are the people that you will spend a lot of time with over the coming months and years developing the business.

        It is great to hear that your startup is not rushing too quickly to market. Some markets can handle it, some cannot. It sounds as though your team is striving to find that balance so that you don’t produce poor quality solutions.

        All the best to Zavee!

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  9. it appears to me that what you are suggesting is actually happening and hence the myth is evolving, no real need for a new one. heck, when i started my first venture in 1986, the mantra was to spend the first five years building the biz to reach stability and hopefully by the 10th year there could be an exit or you’d be making enough not to need an exit. in the mid-to-late ’90s we began seeing overnight (or at least w/in 1-3 yrs) successes. hence, the current myth you refer to is less than 15 yrs old and has evolved into being. from what i can tell these days fm the many entrepreneurs i interact with, it is evolving back to a place where they are requiring fewer resources to reach profitability and determine they’re own fates (to exit or not).

    sounds like the current myth is a moving target rather than a fixed idea.

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    1. That is a good point. Most of my friends are entrepreneurs of one type or another, and maybe this whole post comes out of a desire to see entrepreneurship celebrated beyond the type practiced by venture-backed startups.

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  10. Insanity is doing the same thing over and over an expecting different results. Since the 1980’s VC’s have looked at the companies the same way, invested the same way and expected results that don’t happen. 95% of the money is lost? That’s not the entrepreneur, it’s the investor’s criteria that’s flawed.

    For starters, let go of the notion that a patent is valuable. Customers come for content.

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