What's the status of Startup Nation? Fledgling tech companies are smaller, more numerous and a bit crazier if you ask top executives and investors gathered at the Supernova 2009 technology conference in San Francisco this week. Prominent angel investor and venture capitalist Dave McClure puts it this way during a panel discussion. "There is a lot of experimentation happening at incubator and seed level but less on the Series A level," says McClure, referring to the first significant venture funding round.
At the same time, startups are running leaner, meaner and more aggressively. Says Rashmi Sinha, founder and CEO of online slide-presentation company Slideshare, "You can take very little money to try out an idea."
Sinha talked about how she was able to do many things on the cheap, primarily through heavy reliance on open source software and online and cloud-based services. "We used Amazon S3 and Google AdSense," she says, referring to the online retailer's storage service and the search giant's ad network. "So we were getting paid for our ads right from the start and Amazon made our costs of moving content much lower. As a result, the costs of streaming and content we were able to take care of right from the beginning with this Amazon and AdSense combination."
With hundreds of companies like Sinha's, the venture capital community is undergoing a huge shift to an environment where the big early investments are not only unneeded but also unwanted. Startups that formerly had to buy dedicated servers and pay big dollars just for basic infrastructure "had to take $5 million just to launch," says Christine Herron, a venture capitalist at First Round Capital and former startup executive. " Not anymore."
That has meant a change in expectations of venture capital firms that are now making many more smaller bets with hopes of smaller dollar exits, but more of them. This shift has been particularly hard on larger venture capital funds that amassed huge war chests in the mid-2000s and now are struggling to get sufficient deal flow to put their capital to work.
"It's tough for big funds to make money these days," says McClure. "You have to be more of a single's hitter -- less Barry Bonds and more Ichiro Suzuki."
A single means, of course, exit strategies that involve an acquisition rather than going public. In a few instances, this has been a big win. AdMob getting $750 million from Google, for example, was hardly a small exit.
But McClure admitted that even the $170 million exit for personal finance provider Mint.com, while a home run for investors, was not the type of grand slam (like a Google or a HotMail exit) that returned 50 or 100 times the initial investment to early shareholders. The other side of this coin, as McClure discussed briefly, is that the venture capital sector will need to shrink by a considerable amount to correct the huge glut of money chasing a limited number of startups.
The upshot of that reality is, for startup CEOs, despite the Great Recession, they still hold the upper hand in dealing with funders, a turnabout that still feels very odd to anyone who remembers the go-go days of dot-com madness.
Alex Salkever is Senior Writer at AOL Daily Finance covering technology and greentech. Follow him on twitter @alexsalkever, read his articles, or email him at firstname.lastname@example.org.
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