image via Wikipedia
Earlier today in Palo Alto, I met with an old friend who back in the 1990s, built a number of very successful consumer products companies that combined hardware and software. (I’m not sure he wants me to say his name publicly).
We talked about a number of things like his next company and things he wants to build. We also talked about his frustration with VCs and entrepreneurs these days. His view is that we are too afraid of technology risk when creating & funding startups.
I’m probably being too kind here – his belief was that VCs only want to deal with market and business model risk vs technology risk these days. We don’t’ build products that are hard to build or might not be possible to build. As a result entrepreneurs are working on those types of things. The problem in his opinion: ideas get smaller, innovation levels off and me-too thinking sets in as yet another “myspace on steroids” gets funded.
He summed up his feeling by asking me “Where’s the ‘silicon’ in Silicon Valley” ?
I’ve been thinking about our discussion and a few thoughts come to mind:
1 – I do like consumer web services that take advantage of open source, open api’s, and hosted infrastructure and focus on scale. We have several startups in our portfolio that got going with a modest amount of capital. It’s a very nice model where entrepreneurs can start with little dilution (since they are raising little money) and VCs don’t have to invest significant capital upfront to see market traction.
This is a powerful model and I hope to make more investments with this approach.
2 – Just because a company is building something with little capital doesn’t mean it’s a little idea. Twitter started with a modest amount of capital and a few engineers. Boxee started with angel financing and a small team. I think you would agree that these are not small ideas.
3 – I do believe some investors are still comfortable taking technology risk. It’s very apparent in cleantech and biotech. We are taking technology risk in a number of our investments as well. For example, when we first invested in Kateeva, Verivue and Bug Labs it wasn’t a slam dunk that these products would actually work as originally conceived by the founders. Those companies require much great capital to design and build their products. And I know a number of VCs that are also taking technology risk in their investments.
4 – But my friend is right. We are building less hardware companies. We are seeing more companies that can build things in a matter of months not years. We are seeing programs like YC and TechStars help start companies with less than $10k. Those programs are growing and I don’t see them slowing down. That’s a good thing.
It’s true, the term “Silicon Valley” doesn’t mean what it used to. SV has evolved from its roots.
But we don’t have to build hardware to build stuff that matters.
At the same time I’m definitely keeping this conversation in my mind as I meet startups with significant technology risk.
I didn’t rule out those companies before and I’m not going to in the future either.
Here’s to the crazy ones!