Following up on the “seed fund crash” meme that I commented on last week, Chris Dixon wrote a thoughtful blog post. His main point:
It’s not the seed investors who are smarter – it’s the entrepreneurs
He makes a fine argument about how entrepreneurs today are more informed, with new seed funding options available. And he cites a key seed fund advantage: they’re in early, at lower valuations, before the VCs.
However, my issue is not about entrepreneurs (or investors!) being “smarter”, it’s about the overall ecosystem. From a macro viewpoint, I’m feeling a replay of Bubble 1.0:
- Many new investment entities and professionals (e.g. new angel investors, new seed funds, existing VCs that want to do seed investing, etc.)
- Excess of capital (most investors will tell you there are too few projects, and the ones that are investable, are too competitive)
- Follow-on financing rounds driven by bid-ups, not by business fundamentals
Capital efficiency amplifies these issues, because small amounts of capital quickly make things very crowded. I’ve written before about the “weedy ecosystem”. Being just smart is not sufficient, because entrepreneurship is ultimately zero-sum: a dumb, poorly funded set of competitors will still steal mind-share, confuse customers, confuse investors, dilute your brand, and make it harder to build your business. I see evidence of this every day: ever narrower ideas, because it’s just so insanely crowded.
In the limit, the ecosystem becomes a lottery. We’ll see a few nice exits, I’m sure, but it will be (mostly) because of luck, not skill. For an entrepreneur, that’s a very tough game to play, I prefer the Slotzo games.
(Note: these comments apply to the most crowded, most capital-efficient technology projects: such as software pure-plays, consumer Internet, “new” mobile, etc. For ideas that have real technology, real IP, or some other non-replicable component, things get a lot more interesting, for both entrepreneurs and investors).
I agree with Andy about the emergence of a possible seed bubble. And I have been through a similar situation with an earlier business. I raised $1 million in corporate strategic funding from Times Mirror in 1995. At the time Times Mirror was seeding a number of new media businesses to see what would hit. I didn’t realize that I was just one of 10 businesses to be seeded in this fashion. But soon after the money was in the bank, I got very little time from my investors and almost no support. Then the CEO was replaced with a guy who had run a cereal company and he essentially nixed all of this investment activity. Then I became a “boat person” with no port to call home. After I ran out of funding, I had literally no options for additional funds. Because I could not get support from my first round investor. I was tainted goods. The company went belly up and it was a very painful experience for all involved. What I see coming today is a huge number of seeded businesses which will hit a bottleneck for new rounds of funding. Very few will make it through. Believe me. It is no fun. (But it is a great “learning experience”.) As an entrepreneur under these conditions, I’m inclined to keep bootstrapping until we are worthy of a real series A. I’d rather not get caught in the weeds. Again.
also much like Bubble 1.0, the press release has become as important as — maybe more important than — the product release.
I am not an academic and I can’t claim to have any solid research on these “bubbles”. There is a great book titled “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay. Periodic excess have been a part of the economy (and the rest of society) for a really long time, and I wonder if they are not a necessary part. These periodic convulsions seem (sometimes) easy to predict. But, the question seems to me to be does good stuff come out of these episodic frenzies? Put another way, can the process of business innovation exist in a nice linear world? Can just the right amount of capital be aligned with just the right entrepreneurs to eliminate risk and carnage? Just stating it makes it seem unlikely doens’t it?