Venture Capital Bubble?
Posts like this scare me. I have been predicitng an upcoming shakeout, but Fred Wilson of Union Square Ventures has posted about dumb money. Fred’s reasons for not liking dumb money are: It drove up valuations and financing sizes, drove down decision making timeframes, pushed smart money out of syndicates, harassed management, fed venture fratricide, and worst of all, was gone in a flash when the bubble burst.
For those of you who do not know what dumb money is, it’s essentially finacing (typically venture capital) that has no strategic or additional benefits attached. There are many firms that just hand over a check (or wire the money to your account) and never talk to you again… this really only helps entrepreneurs by giving them capital. Venture relationships are/should be more than just dollars. Good VC’s should be in the ‘know’ and can leverage their relationships to help their portfolio companies. Also, they could also lend a hand in building and forming the business, structure, operations, and potentially, being a sounding board for management issues. This is known as smart money. Other smart money could be strategic investments by companies within the space you are moving into.
Why does Fred’s comments scare me? I knew the shakeout was looming, but Fred is trying to get ahead of the curve and predict it before it happens. Maybe it’s closer than expected?
There is nothing wrong with investors just handing over a check, and taking a passive role. This does not make the investment good or bad. Ideally start-up teams are so strong that they do not require major assistance from VCs.
AS far as I know their is no correlation between the amount of influence a VC has and the success rate of the startup. If VC influence would only be positive then explain to me what happened to all the VC incubators?
I think that we are in for a correction, and I personally believe that their is too much hype surrounding web 2.0. How ever I do not think that we have a bubble like in 2001, because the smart VCs will this time stop making investments in over-valued web 2.0 companies, and shift their attention to other sectors. The 2001 crash was brutal in that it effected the entire Venture Capital industry since everyone focused their investments mainly on Internet companies and it took about 3 years for the sector to recover in Europe. Now a days VCs are more diversified so I do not see the potential of a bubble. At least I hope not, I will be soon seeking funding for an esport company, but our business plan will not depend solely on ad revenues.
I don’t think the shakeout will be even close to the last time. First off, the amount of 2.0 companies being built with sub-7 figure investments is astounding. How many of these built on the LAMP stack and paid for out of a founders own investment is probably more likely then the hundreds of millions spent in the past on the Excites, Lycos, etc…
I think things will thin out but with bandwidth basically still cheap… open source development leading the way… companies will go out of business this time… but I think new ones will keep opening up. The creme will rise to the top and for at least another year or two until the democratic presidential recession hits… we should be generally not be too worried about a “crash” as bad as 2001/02
I think a crash is coming but will happen but to the mobile and satellite radio sector.
It’s my belief that there will be a shakeout – and the shakeout I’m predicting will affect all types of companies, not just venture-backed. It doesn’t matter how much money is invested in, but companies of all sizes and shapes will be potential for this shakeout. The me-too players and the non-differentiators are all at risk.
Well heres to hoping we make out like bandits before that day comes then. cheers
This one makes sence “One’s first step in wisdom is to kuesstion everything – and one’s last is to come to terms with everything.”