Great post by Steve Blank about “The Lost Decade” or the past ten years of the most f’d up entrepreneurship market that I have ever seen in my lifetime.

I’ve been working up a post on this for some time in reflection to the past ten years of shit.  I’m 44 years old and the past ten years have been the “so called prime of my earning life” where I’ve spent the entire time working on startups in Silicon Valley.  Silicon Valley is the heart of enterpreneurship and there has been plenty of trying, but no exit or liquidity market.  FooBar.

Here Steve says something that is wrong:

If you take funding from a venture capital firm or angel investor and want to build a large, enduring company (rather than sell it to the highest bidder), this isn’t the decade to do it.

My rant on Steve Blank: I agree with most of Steve’s post except that I disagree with his “all wet statement that you can’t build a durable company”. Note to Steve: you’re all wet that durable companies can’t be built.  You assume the capital markets are the only source of cash – try revenue “pal”. Yes, huge companies have been built,  from generating revenue, by solving problems and getting paid. Yes good old fashion business model stuff. Happy to debate with you anytime.

Anyway agree with most of it and I’ll add my angle here in Silicon Valley.

My take: The big problem is lack of liquidity. My last company was venture backed in Silicon Valley.  It bombed due to being built to be scalable but no expertise really showed up.  When there is no capital markets both on the public and M&A side I can tell you that things get crazy.

Steve does point out some good observations in his post:

The system worked in predictable and profitable ways. VC’s invested their limited partners’ “risk capital” in a portfolio of startups in exchange for illiquid stock. Most of the startups they invested in either died by running out of money before they found a scalable business model or ended up in the “land of the living dead” by never growing (failing to Pivot.)

Startup lifecycle in an IPO Market

But a few startups succeeded and grew into profitable companies. Their venture investors made money by selling their share of these successful companies at a large multiple over what they originally paid for it. One of the ways most predictable ways for an investor to sell these shares was to take a company “public.” (Until 1995 startups going public typically had a track record of revenue and profits. Netscape’s 1995 IPO changed the rules. Suddenly there was a public market for companies with limited revenue and no profit. This was the beginning of the 5-year dot-com bubble.)

Most VCs don’t know what to do with portfolio companies after 3 years (even when they are performing ok) Their model is 3-5 year horizon. I would argue with the new environment that their investment time horizon is now limited to 3 years. If there is no exit after 3 years the number of investments a partner makes starts to backup – what I call “portfolio gridlock’. This means that they get “deal backlog’.

A venture partner is like a sales rep – they need new deals in their pipeline and to get the old ones out. No human can be on 9+ boards and be effective. So VC need to get rid of their old companies and make way for the new. It’s a problem screaming for a solution.

Here’s the problem in today’s market when there is no exit model. Most VC partners in Silicon Valley are so backed up their ‘back teeth are floating’. The other problem is that the VC model is all about building up more equity in the later years (control equity to prepare for the exit). So you have a venture capital firms with majority control and no time and energy to assist the companies. And now there is no exit.

An Opportunity
I think that this is new ground for VCs and certainly challenging. However it’s an opportunity. There are some great companies out there who are building businesses. Problem is the VC are in control of most of them in a dead market for exits. The need of the VC is to unload these companies. In the current market just shutting them down or quietly selling them kills the entrepreneurial edge and jobs – a blow to the entreprenerial system. It’s an opportunity for new kind of investment firm one that services this macro trend.

Keep the Founders Around

Enterpreneurs need to be in charge for long term success.  In my experience I would say that the faster the market moves the more the founder needs to be in charge. Finding a founder with vision, product skill, and deal making ability is ideal. Venture capitalists need to let the founder run the ship. If VCs run interference with the founder then the entire venture slows down. Building a startup from nothing is difficult and navigating the market landscape with imperfect information is key. Entrepreneurs are good at dealing with ambiguities.  Many would say let the founders get to critical mass and bring in a CEO  to craft the exit. I think there’s merit to that philosophy. The problem is the trend was for the VCs to pull the trigger to early because they’re so focused on getting control and washing out the founders.

Once a venture enters the market, the venture plan has to be in a constant state of reinvention to ‘hit’ the tipping point for the preferred business model for the proverbial ‘big opportunity’. One thing often over looked is the important objective of getting the new venture in a position in the market to seize the growth opportunity contemplated by the entrepreneur and the investor.

Entrepreneurs and VCs need to deal with change as a positive not a negative. If the ventures position in a growing market is good then the change is a normal characteristic. To me it’s about letting the founder stay in control until the venture hits calmer waters. Founders know best in the early stages. Creative, product, sales, and deal making skills matters the most. VCs shouldn’t just replace founders because a few waves crash on the ship.

The counter to this of course is the founder treats the venture as his/her baby and can’t process negative information. I would put a caveat in saying that great entrepreneurs are honest with themselves and constantly question their assumptions. Having an active board that is value add (not value subtract) provides credible thinking that may be counter-intuitive is valuable. It’s a team effort.

If investors want a return remember that the founders know best.

Plan B For VCs

Did you know the best deals in Silicon Valley have been invested by firms not located here. Twitter, Zynga, Foursquare, etc.  This is a wake up call to the Silicon Valley VCs.

The new VCs (not talking about the tourism called SuperAngels) are about added value and doing deals early.  Something we’ve been doing in a lab environment at SiliconAngle called SiliconANGLE Labs.  Other venture backed startup in Palo Alto which I can’t talk about is doing the same.  Entrepreneurship is changing and so are the smart VCs.  Right now as I post this I am sitting in SiliconAngle’s new office and am colocated around three startups all funded by top VC firms.  Smart money is betting on the new model of entrepreneurship.  From my direct interactions I can say that only Accel, Benchmark, True Venture, Union Square, and Avalon are in this new breed of VCs.

I can’t get a read yet on Andreessen Horowitz because they are so busy raising a fund they won’t meet with me.  Some are saying in Silicon Valley that Andreessen Horowitz is moving too fast and might implode if they put on another fund.  Remember that VCs get compensated by dollars under management so raising a bigger fund for Andreessen Horowitz makes sense since the IPO market is not in sight for a long time.   I guess their motto is that “Fat startups require Fat VCs”.   Ben Horowitz has a great blog and worth following at bhorowitz.com.

In his post Steve Blank makes a good point here – I agree totally.   He says

None of this has gone unnoticed by the venture community. Some of the old-line venture firms have changed their strategy, but some are still locked into last decade’s model while the partners are living off of their management fees and go through cargo cult like rituals. You can tell who they are by how often they remind you “this is the year the IPO market will come back.” (If the limited partners of these VC’s acted like real fiduciaries rather than waiting for the end of life of the fund, more than half of old-line venture firms would have shut themselves down today.)

New, agile and adroit venture firms with new business models have emerged to deal with the reality that 1) web 2.0 startups require significantly less capital to start, 2) exits for venture firms are predominately acquisitions, and 3) a venture firm with a smaller fund <$150M matches these exits. Floodgate, Greycroft, Union Square Ventures, True Ventures, etc. are example of this class of firm. (Raising a VC fund in this environment had it’s own perils.) And the explosion of private Angel firms continues to fuel this new ecosystem.

Other VC’s who invest in Information Technology have taken a different approach. They’ve created virtual IPO’s for founders and employees via late-stage private financing. It has put a per user dollar value on these sites and these few startups will be the next likely IPO candidates. In their short time as a fund, Andreessen Horowitz seems to be on top of this game with their investments in Facebook, Skype and Zynga.