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Think Big. Move Fast.

The first decade of the new century witnessed a fundamental change in the nature of the technology entrepreneurship. The dramatic reduction in the cost of starting a technology business combined with readily available risk capital has created a near perfect market for anyone with an idea and some risk tolerance to become an entrepreneur. This democratization of entrepreneurship has profound implications not only for the venture capital industry but also for the economic growth and prosperity.

The maturity of the Internet as a platform and the growth of open source projects have given rise to infrastructure-as-a-service providers that allow companies to almost completely eliminate the upfront capital expenditure and pay based on usage of the infrastructure. The entrepreneurs are leveraging the outsourced infrastructure along with Internet based low cost distribution to test and refine business models. The so called “Super Angels” who are a new class of risk capital providers have emerged to support such early stage Internet business model experimentation. In most cases the outcomes of such experiments are determined with less than $1M in invested capital. The successful models then go ahead and raise substantial venture capital to scale the business. What is the most interesting is, unlike the previous generation of technology entrepreneurs who were building infrastructure components of the so called technology stack, this new generation of entrepreneurs don’t need deep domain experience to start web based businesses as vast majority of the new companies are business model innovations with some technology pieces layered in. Further fueling this phenomenon is plenty of early exit opportunities for these companies even if the business model turns out to be not very scalable.

The democratization of entrepreneurship is net positive for the Silicon Valley ecosystem. The reduced barrier to entry and cost of failure have encouraged hordes of new college grads and corporate professionals to start companies. The traditional venture capital market is more efficient than ever because only somewhat proven ideas get further funding to scale the business. The venture firm brand name is not the most significant determinant of deal access especially in early stages due to serendipity factor in the identification of teams and business models. The market is much more of a level playing field for all.

Some people argue that easy access to capital and plenty of early technology/talent exit opportunities would create a culture of “fast flippers” where entrepreneurs would avoid long and hard slog of building large, standalone businesses that made Silicon Valley. Surely, there are well funded startups that look more like lifestyle businesses with no real potential to scale. However, we are early in this cycle and I believe market forces would eventually bring equilibrium.

I am more excited than ever about the pace of innovation and the resulting economic growth and prosperity. The unleashing of communication revolution combined with ubiquitous computing is creating level playing fields for consumer and entrepreneurs alike around the globe. We are indeed living through an age of acceleration where erstwhile temporal distances are getting squeezed. I will write more about it in the future.

  • http://www.facebook.com/davin.riley Davin Riley

    Bipul – I can’t help but to feel like you are writing this post in a VC bubble. Yes, innovation abounds but the “resulting growth and prosperity” you are “more than ever” excited to see rings of a naive discounting of what is going on beyond the flourishing tech centers of the US or the world for that matter. Silicon Valley (broadly speaking) cannot and will not flourish ad infinitum in isolation as the rest of the US economy sinks deeper into depression. There are major macro movements occurring and I will agree with you…we are in an age of acceleration alright. Software, hardware, social media, e-commerce, ad-supported content…most of what we are working on as Internet/technology entrepreneurs are only as valuable as the next willing costumer and consumer. Sometimes I wonder why I don’t hear many VCs talking about the macro picture. Big tech companies flush with cash (the coveted Apples and Googles, etc) will likely fair well for the foreseeable future but when the macro-risk wave comes…are many VCs/Angels investing with an eye on the real economy and not just micro-metrics like pageviews, CTR, and gross margin?

    FYI – please don’t misinterpret this as an affront on the value being created by the virtuous VC/entrepreneur cycle. I simply don’t agree with your bold claims for economic growth and prosperity when the global data shows that our innovation does not alone make for national or global prosperity.

  • http://www.kitchenindex.ie Colin

    Really interesting article.

    Do you think that with the increased number of start ups that there are an increased number of them getting funding, or are the percentages/ratios the same?

    One thing I have seen of late is some start ups with highly questionable growth potential get funding. I’m talking at angel level. Has it become almost kamikaze?

    Also, would investors rather take high risk on a start up company that could eventually sell for $20million, or invest a smaller amount in a start up that will easily achieve $1million in sales and sell for $3million? Do they prefer high risk/high return or low risk/moderate return?

  • http://twitter.com/ChrisEYin Chris E Yin

    Although I agree with what you say, we are far from a perfect market for startups. There current trend involving Superangels is microinvesting, incubators, etc.

    However, we can go one level further and begin investing even earlier than micro-investors– at the college/high school education level. We can train entrepreneurs technically as well as in business to create companies, therefore “investing” time into people before they even show an inclination to tech. This way we have more control, a much larger and quality deal flow, and it will open up the doors to entrepreneurship 10x more than y-comb or techstars ever did.

    Visit at pathwaysventures.org– this new model is what we are currently working on

  • http://www.kitchenindex.ie Colin

    Really interesting article.

    I have seen some internet start ups receive angel funding and really struggle. Yet I know a lot of start ups that cannot get funding but would accelerate if they did and are struggling because they can’t.

    What do angel investors want? Is it a start up that is high risk but could yield high returns or is it low risk start ups that could easily sell for €2-3million in a few years? Do they prefer to take a punt with a $1million investment or invest $100,000 and feel secure in their investment.

    For me it is really frustrating. If I could raise $50,000 to $100,000 I know the investors would make their money back and some. But I see them investing in to websites that will really struggle. My business is simple and can be scaled globally once it is operating at its optimum level.

    Your thoughts would be great!

  • http://www.facebook.com/davin.riley Davin Riley

    Nevermind – seems WordPress was acting up. I would really like to hear from you your insights as to how VCs are thinking about this in this “frothy” period. Thanks!

  • http://innovativethinking.posterous.com/ Innovative Thinker

    Yes, the flippers are here. And they make it difficult to find funding for larger platforms or larger business endeavors.

    But, that doesn’t mean they are completely bad. Flipping (just like the recent house flipping) is fine as long as it’s done with the long term effects in mind.

  • Bipul Sinha

    The number of start up companies getting some kind of external (Super) Angel, Micro VC funding has surely increased. The Risk reward equation dependents on the fund size and the investment model.

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