Innovation Doesn't Take a Vacation in an Economic Downturn
By the end of 2008, Venture Capital had been officially declared dead. Startups were laying people off so fast that even TechCrunch couldn't manage to keep up. University Endowments and Foundations, the source of the "capital" in Venture Capital, were hemorrhaging so badly from their public company investments that many long-time believers in "alternative assets" declared a moratorium on Venture Capital. And the IPO market was a distant memory. Good times!
Welcome 2009. The public markets remain closed. Venture investors and the investors in venture investors remain "challenged." Follow on financings have become increasingly difficult, in some instances impossible. And, while there may well be light at the end of the tunnel, it would appear that we haven't gotten far enough down the tunnel yet to see that light.
So why am I optimistic about investing in 2009? Because entrepreneurship is an addiction, it isn't a choice. Great entrepreneurs aren't driven to create companies because it is easy, or because capital is plentiful, or because the public markets are swallowing anything the venture community will throw at them. Great entrepreneurs start companies because they can't help themselves. They see a problem or a solution or white space or an opportunity and they have to do something about it.
Innovation doesn't take a vacation during an economic downturn. Innovation is a constant. While the resources an entrepreneur may be able to bring to bear on a problem may vary with the economic climate, the desire -- the need -- to innovate never goes away. And Venture Capital is the fuel of that innovation. [1]
So I remain excited about the companies that will be started in 2009. There will be great companies started during this economic crisis. Some of them will be born out of the crisis itself. Others will simply be born during the crisis. But, rest assured, there will be important tech companies hatched in the next year or two. And I am certainly hoping to fund them.
[1] Some of you reading this will say to yourselves "starting companies today is so inexpensive that we don't need no stinkin' VCs." More power to you. I don't mean to suggest that innovation will die without Venture Capital. There are many great ideas that can come to fruition without a meaningfully-large capital infusion. My hat is off to the 37 Signals and Smugmugs of this world. But for those ideas that require investment ahead of revenue to reach their full potential, Venture Capital remains an important resource for company building.
I am glad to hear that not everyone is lying down and giving up. We have been diligently working to obtain funding for a technology and sports based social network over the last two months and to know that there are people out there that feel that "innovation doesnt take a day off" is music to my ears. Rather it gives us more motivation.
There is another aspect I would add to your equation about venture investing in a downturn. Part of the reason we have downturns can be attributed to the idea that companies just don't need more of the same, hence the decline in purchasing from existing sources. When push comes to shove, companies are finding more fat than value in their current purchasing patterns.
Of course this crisis has many exogenous drivers, but if you look at the current state of tech, it's been very incremental on the infrastructure side for 5-10 years now. This is exactly when disruptive innovations are needed to unlock corporate budgets. If you can walk into the CFO's office and say, "I can save you 30%-50% on your IT SG&A expenses," (and you can prove it) you will get an audience and your message will be hand-carried to the CIO.
These types of innovations are not often created in the halls of the incumbents. First, budgets for innovation fall (not that incumbents are very good at it with more spending). Second, in boom cycles, the talent supply needed to start piecing together these innovations is somewhat low. They have a good option staying in their comfortable corporate jobs. Bonuses flow like wine. In downturns, more people with industry knowledge are pushed into the cold, which creates a greater supply of entrepreneurs for VCs.
So, in some senses you have a perfect storm: a greater need for innovative/disruptive solutions and a greater supply of people who are capable of creating them.
Best,
Jake
"Some of them will be born out of the crisis itself."
Great quote. In a great economy, money hides problems and opportunities. Companies will get orders whether or not they innovate. But in a bad economy, lowering the water level will expose new opportunities to our corporations. I wrote more about this on Venture Hacks: http://venturehacks.com/articles/water-level
We have interviewed many entrepreurs on our "Economy Builers" channel...and they all agree this is the time that Innovation will Thrive...
http://www.w3w3.com/Channels/Entrepreneurs/index.html
The mass media along with some help and support from a handful of new media outlets have done it. Their words and pictures have cast a wide cloak of 'fear', 'hate' and 'doom & gloom' in our state, our nation and around the globe. Are there challenges? Of course there are. Pat & I have been married for 37 years, lived in five foreign countries and owned and operated our own companies in those countries and have launched 12 startups. There are always challenges...the time is right!
"Because entrepreneurship is an addiction, it isn't a choice." My first hearty laugh today, because today I learned. . . I'm an addict. Great quote! I too am excited by this economic downturn. Some giants will finally fall asleep and in the space their slumber creates we will experience the awakening of some very cool companies. Great post.
I truly believe you are right that entrepreneurship is an addiction. Thanks for this great post making us all confront this reality. You did us addicts a service. "I am Shallie Bey and I am an entrepreneur".
Smarter Small Business Blog
Hi David, Great post. Many would be Entrepreneur's should not bale out early and go on a vacation because you and the other comments are right. It's a great time to have a startup and innovation opportunities are rapidly increasing. I've been thinking about the career alternatives new startup founders have in a recent post http://nickpoint.co.uk/2008/12/18/5-career-alternatives-for-start-up-founders-during-the-recession/
However new entrepreneur's have to get the addiction of the constant startup highs and lows first or they will miss these new innovation opportunities. They also need to have the funds to last the depths of the downturn because many of the Angels/VC's are closing their doors.