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 (s goog) or a Microsoft (s msft) or a Cisco (s csco). 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?