15 Nov Start-ups grow up
The business section of Sunday’s San Jose Mercury News opened with a banner headline: “Investments off 35%.”
After several quarters of increasing investment, venture capitalists put “only” $1.45 billion into new businesses last quarter, down a third from the second quarter of 2004. This is according to the MoneyTree Survey conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. While a 35% drop in venture investing may take the wind out of the sails of early-stage financing seekers, the picture might not be as gloomy as the numbers suggest.
For one thing, the Merc article speculated that many start-ups delay announcing their funding in order to stay in “stealth mode” longer. This new tendency, designed to keep competitors at bay, leads to under-reporting of venture funding. In other words, stealth start-ups contribute to a perceived decline in venture investment, and more dollars may be going into early stage ventures than are being reported.
It’s possible, but I’m doubtful that enough companies are off the radar to account for a half-billion dollar decline in reported venture investment. Over the last six weeks, I’ve met with nearly 100 companies on my journey to identify and bring to DEMO@15! next February the handful of new products that are truly groundbreaking. All of these companies are working in secret on their next products. Some are working in stealth mode. Few of those in stealth mode are sufficiently funded by institutional venture capital to make up the difference in the declining venture numbers.
Whether venture capital investment is up, down or flat, I think there is another more important story behind the numbers. By any measure -with or without stealth start-ups—venture investing is down from the heady days of the late ’90s, and that might be the best indication that we’re about to enter an exciting period in the marketplace. Low levels of funding and a tougher course of due diligence mean that early stage companies must fight a Darwinian battle for survival. To make it from inception to market, these companies must conserve cash, leverage resources, court customers, and out-think looming competitors.
Those that survive arrive to market stronger, smarter and ready to grow. They arrive ready to use venture capital in all the right ways to scale quickly. Gone are the days where foosball tables and Aeron chairs adorn the start-up office. These days, venture money goes to work where it can make a difference—with customer acquisition and retention.
Of the companies I’ve met these last months, more than half are unfunded or underfunded by institutional investors. They have learned to “squeeze a nickel until Washington cries,” as one start-up CEO put it. They don’t have fancy offices, so often we meet at one of the coffee houses that offers a weak latte and a strong, free WiFi connection. More important than the trappings that venture money buys, these companies have great products, passionate entrepreneurs and enthusiastic customers. These start-ups are building companies with priorities clearly focused on the customers and the goal firmly set on creating the right product to meet those customers’ needs.
All this means that the next 12 months are going to be very exciting. These stealth start-ups—stealth by necessity, rather than design—are going to break into the market next year, bringing with them exciting products and satisfied early customers. They are establishing new product categories and recalibrating the expectations we have of start-up ventures.
Over the 90 days between now and DEMO@15!, I’ll hint at what some of these new categories are. But the best way to be in the know is to plan to be at DEMO and see these new, smarter, stronger start-ups in person.
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Chris Shipley is the executive producer of NetworkWorld’s DEMO Conferences, Editor of DEMOletter and a technology industry analyst for nearly 20 years. She can be reached at chris@demo.com. Shipley, has covered the personal technology business since 1984 and is regarded as one of the top analysts covering the technology industry today. Shipley has worked as a writer and editor for variety of technology consumer magazines, including PC Week, PC Magazine, PC/Computing, and InfoWorld, US Magazine and Working Woman. She has written two books on communications and Internet technology, has won numerous awards for journalistic excellence, and was named the #1 newsletter editor by Marketing Computers for two years in a row. To subscribe to DEMOletter please visit: http://www.idgexecforums.com/demoletter/index.html.
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