The Best of Times

by Eleanor Haas

What’s great?  The opportunity.  What’s not so great?  The uncertainty.  But then, that’s what makes it great!  So concluded five wise, wise VCs and one very wise entrepreneur at today’s Digital Breakfast: Venture Capital Forecast 2010.

What does today’s environment feel like? 

·         In terms of technology disruption, 1987.  In terms of the economy, it’s uncharted territory.

·          Q2 of 03.  A flattish movement up.  A great time for financial technology.

·          Late 02/early 03 in terms of the opportunity, with the full contraction of VC yet to come.  Dramatic changes in the cost to launch an Internet business and how you build the company.  The use of real-time media and social media to build traffic is much less expensive than search.

 1994-1995 in terms of the opportunity and the low cost of entry.

Some highlights:

VCs

·          VCs have started intersecting with angels and finding they can get further with a company for less money and then take a smaller exit.  They are also co-investing with other VC funds.  Some VCs are doing investments as small as $100K and $250K. This enables them to do smaller exits, which in turn has implications for the funding model.  If new investors come in for later rounds, they pay a higher price and cannot make money with the smaller exits.  As a result, their interest is no longer aligned with that of the entrepreneur and early investors.  So, it’s best for the investor group to remain constant.

·          The VC dilemma:  the line between the seed round and A round Is blurred because of the speed with which things can be done.  Some VCs have moved their fund size down in order to make efficient use of capital..

Trends of the Moment

·          Entrepreneurs are building low-cost web-enabled businesses as vertical layers on top of Facebook.   The network effect of Facebook makes it essential that Facebook or a Facebook widget be a component.  Business-to-business sites all have Facebook Connect today.  You can build businesses like GolfTripGenius for a few thousand dollars.

·          Entrepreneurs have the opportunity to build good technology-enabled businesses – inexpensive to launch and profitable for the entrepreneur – but they may not necessarily be investable.

·          LAMP-plus infrastructure for hardware with Facebook has brought web site start-up costs dramatically down.

·          What’s important at this moment is “clever” technology as opposed to “proprietary” technology – technology that’s not necessarily costly and represents something done in an interesting way with a value proposition.  The package that creates value consists of traction plus the technology plus the skills of the entrepreneur.

·           Marketing is as important as technology – the ability to get customers. 

·          The value of patents is lower because they’re too hard to value and take too long to become effective.

  Mobile is a channel, not an investable vertical.  It will be part of everything, not just apps that are location-based.

The Digital Breakfast was organized by Gotham Media Ventures. The moderator was Gene DeRose, House Party.  The VCs were Charlie Federman Crossbar Capital; Howard Morgan, First Round Capital; Lawrence Lenihan Jr., FirstMark Capital; David Pakman, Venrock and Daniel Schults, DFJ Gotham Ventures.