Silicon Valley Entrepreneurship 2010—A Door Closes but A Window Opens
The recent Chris O’Brien post in SiliconBeat on a shrinking Silicon Valley certainly underscores both the diminished IPO activity as well as the reduced VC funding we’ve seen over the last 18 months. Funding deals and dollars invested are down upwards of 50%. Moreover, the number of VCs who are hurting (feeling the pain from their poor historical rates of return) but still active is now only slightly larger than the number who are either shuttered or qualify as the living dead. See TheFunded for detail on the latter group which by their count totaled 353 firms as of this week. One huge by-product of the VC contraction is that new VC investments are decidedly moving away from seed and early stage opportunities.
So with all this bad news one would naturally conclude that new world realities in Silicon Valley would severely dampen entrepreneurial activity. If both institutional funding at the front end and liquidity at the back end of the venture cycle are severely curtailed, entrepreneurship would naturally lessen. But ironically the reverse is actually true as local new business activity is as strong as ever. So what’s going on?
1. Angel funding and “friends and family” deal flow is robust—ask anyone affiliated with an angel group; e.g. Sand Hill Angels, Band of Angels, Angel’s Forum, Life Science Angels, Keiretsu. In 2008 there were about 200 Series A deals in Silicon Valley (and about half that many in 2009) so even in a good year the VC start-up activity pales in comparison to the thousands of entrepreneurs and start-ups with non-institutional funding.
2. Start-up seminars, education, training and support services are more plentiful than ever. A record number of slick incubator and start-up resources are now available, from PlugNPlay, Y Combinator, and the San Jose BioCenter to The Stanford Entrepreneurship Network (Stanford has 14 different entrepreneurship organizations). In addition, several competing high profile educational options for smart young entrepreneurs like Founder Institute, are attracting hundreds of first time entrepreneurs who have great ideas but are hungry for experienced advice and counsel to implement them.
3. Access to high profile professional services, e.g. legal, audit, etc., once only affordable by well-heeled VC portfolio companies, are no longer priced in the stratospshere. The area’s top professional services talent like Wilson Sonsini and Price Waterhouse Coopers—either out of necessity or as an appropriate marketing response to current conditions—now have a significant and growing amount of client activity among very early stage companies, many of which do not have, and will not get, VC funding. This phenomenon delivers high quality support to the base of the start-up pyramid at an unprecedented level.
4. Access to quality tools and templates for managing and funding start-ups has improved. Term sheets and other complex start-up documents are available publicly from firms like Fenwick & West and Wilson Sonsini. Their public availability takes the mystery and much of the cost out of an equity funding event, even if it’s money from mom and dad, and makes it as easy as buying a stock on ETRADE.
5. Many are betting on the cycle turning around. Money and exits will likely be easier to come by in the future, and entrepreneurs are nothing if not hopeful of such a turnaround.
6. More entrepreneurs are asking “how do I build a company and make money with very little capital?” than are are asking “how do I get big, fast?” and the effect is 2-fold: because start-ups are looking at opportunities in niche markets where such opportunities typically reside these models are inhgerently of less interest to VCs because they are smaller. Conversely they are of more interest to angels and friends and family because they can succeed faster with less capital, and the need for downstream, dilutive financing is low.
7. Metrics have changed. It’s no longer about building a company based on form (eyeballs, seats, etc.) but on substance (repeat customers, gross margin, profit, capital utilization). Investors are demanding it and entrepreneurs are responding with business ideas and models that focus on sound business metrics.
8. It’s OK to build something modest, as long as it succeeds. Guy Kawasaki is famous for telling entrepreneurs that a venture that may not be fundable by venture capitalists (too small) can still be a great business to be in.
9. Owning and running a successful privately held business is still the best way to create wealth and most are closer to $1M than $100M in size.
So a door may have closed for entrepreneurs that seek venture funding, but a window has opened for entrepreneurs who are nimbly responding to the new day.
J. Weston (Wes) Rose is Senior Vice President of The Brenner Group, one of Silicon Valley’s premier professional services firms, and he now runs the firm’s interim management and restructuring practices. Wes brings more than 20 years of general management and operational experience in venture capital backed technology companies, having served as CEO or COO with five early stage companies.
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