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This weekend I was reading a blog post written by Chris Douvos. Chris is an investor in a number of well-known venture firms and writes a blog called Super LP. His commentary always cracks me up, even when he's writing about the finer points of risk curves, financial models and the like.

In his post entitled "Keeping the Window Open," Chris cautions the investor community to not be too overzealous in taking companies public during this time when the gently re-emerging market is so fragile. As he rightfully points out, those companies that go public and then promptly miss their numbers, not only tank their own valuations but also spoil the markets for everyone else. If investors can't trust newly minted public companies to do what they said they were going to do, the markets will simply reject future public offerings as more of the same old head fake.

The conversation reminded me of the good old days when I was an attorney. One of my final acts as a lawyer came at the board meeting of a rapidly-growing but somewhat erratic startup. The venture investors in that startup sat at a board meeting reveling in their growing user-base and began discussing the idea of taking the company public. The VCs were in rousing agreement that we should promptly commence work on the company's S-1.

Lacking a certain self-preservation gene, I pointed out to the VCs that should the company miss its numbers after going on file, it would have to pull the filing and be in a much worse position than when it started. Thus, I strongly recommended that the company wait until it had greater predictability of revenue before filing to go public. Not only were the VCs not wowed by my erudite advice, they promptly fired me and hired another attorney to draft the S-1. Of course, I would not be telling this story if the startup did not ultimately miss its numbers and have to pull the filing. More importantly, this was precisely the sort of company Chris cautions us VCs against taking public this time around -- and I am with him one hundred percent.

There are too many great companies lined up and ready to get public for us to jeopardize the IPO window trying to get middling companies out. As Chris rightfully notes, if we can take solid companies public, "[t]heir success should lead to more opportunity for other companies." If, however, we take marginal companies public, their lack of success will spoil the market for even the most solid of performers.

I realize that the lure of liquidity may be too much temptation for some in the venture community, but I would urge patience in the face of uncertainty. The venture business is a long-term business and the more we can do to grow the overall pie by being circumspect about those companies we bring to market, the better off we all will be in the long run.

It is a challenging fundraising environment out there for sure. And that is not just for startups. This economic crisis has far reaching-tentacles. As the public markets have declined, so too have the liquid portfolios of universities, endowments, foundations. And it is those institutions who are among the most significant investors in Venture Capital. As a result, VCs are finding it equally challenging to raise money of their own.

With that as a backdrop, we at August Capital went out to raise a new fund at the end of last year. And I believe that our experience mimicked that which startups are seeing in the market today. No matter how good your track record. No matter how good your progress to date. Fundraising is hard. Investors are swayed and distracted by external factors that may or may not have anything to do with your business or the likelihood of your success.

That said, just as the strongest startups today are managing to get funding (sometimes even in up rounds), so too are the strongest venture funds. The partners at August Capital have been in the venture business for as long as three decades and have consistently delivered positive returns to our investors in up markets and down. Just as we remain bullish about investing in great companies in these challenging times, our investors remain confident in our ability to make great investments in these challenging times.

As a result, my partners Dave Marquardt, John Johnston, Andy Rappaport, Vivek Mehra, Howard Hartenbaum and I have recently closed August Capital V, a $650 Million fund. We remain focused on early stage high tech startups throughout the technology landscape (software, hardware, chips, etc.). But we also believe that this economic environment will result in a number of larger opportunities -- spinouts, PIPEs, buyouts, etc. -- that will prove to be extremely attractive investments. Thus, we have the flexibility within our new fund to invest as much as several hundred million dollars in a single deal, should a sufficiently compelling opportunity become available. We look forward to investing on both ends of the company spectrum and now have significant resources to bet on the great companies we see, big and small alike.

We certainly consider ourselves very fortunate to have such steadfast support from our investors. And lucky to have the flexibility in our new fund to take full advantage of the opportunities that will arise out of these challenging times. As we said repeatedly during the fundraising process, we believe that an investment in August Capital is a bet on the future of human innovation, and we are very long on human innovation. We have already made four investments out of our new fund and look forward to continuing to invest in the great entrepreneurs we meet every day. We are certain that important new companies will be born during this economic downturn and we look forward to providing the funding they need to grow and prosper.

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.

Over the course of the last week, Fred Wilson has been writing about "Venture Fund Economics" at the newly-redesigned AVC. Fred has tackled topics like how venture capitalists are measured, the impact of management fees and carry on net returns, and the impact of big winners on venture returns. What's more, Fred has done the unthinkable -- he has described venture economics in the context of his own fund's specific economic terms. While he hasn't posted the economic performance of his fund to date (that is probably more naked than even Fred is willing to get), he has posted the model he and his partner Brad built when assessing the attractiveness of raising a hundred million dollar fund. The model is fascinating and brings to light the challenges venture funds face to achieve index returns, let alone the outsized returns associated with top tier venture firms. (Great stuff, Fred!)

Given the challenges faced by venture investors to drive market returns, one reasonably might ask the question, "why do limited partners continue to flock to the asset class?" Who better to answer that question than a bona fide Limited Partner. Enter Chris Douvos. Chris is the co-head of private equity investing for TIFF (The Investment Fund for Foundations). Before that he was with the Princeton Investment Company. Chris is a wildly smart, experienced investor who I always love chatting with. Give one read of his new blog and you'll understand why. In the course of discussing the intricacies of the LP business, Chris makes analogies to baseball, the lottery, greek tragedy and uses classic Chris words and phrases like "horseplay," "impish," "hotties," "livin' la vida loca!" and "Caliente!" Chris's blog is just plain fun to read. And that is saying a whole lot when you consider that Chris is talking about investing in VC and PE firms -- not exactly scintillating material by its nature.

Interestingly, in one of his first posts, like Fred, Chris addresses the challenge of venture economics. Only instead of discussing venture fund economics in the context of a $100M fund, Chris talks about the more daunting $500M fund (Chris prefers the smaller funds -- he says he likes being "long idiosyncrasy and short momentum"). According to Chris's math, a $500M fund needs to create between $12B and $17B in company market capitalization in order to deliver a 3X return (the bar Fred set for himself as well). In Chris's words:

"Here's where it gets dicey for the masses, though (and I'll make some gross simplifying assumptions): if you're an LP and investing in an run-of-the-mill $500 million fund hoping to get a 3x net return, that fund has to generate $1.75 billion in returns ($1.25B in profit less 20% carry equals two turns of profit). Of course, that's just the capital that accrues to the firm's ownership stake. Since a lot of firms end up owning only 10-15% of their companies at exit, you've typically got to gross the $1.75 billion up by a factor of between 6.67 and 10. That suggests that those firms need to create between $12 and $17 billion of market cap just to get a 3x fund-level net return to their LPs. Caliente!

Let's unpack that box a bit more: at the $15 billion midpoint of the exit range above, a firm that invests in 25 early-stage companies will have to get, on average, $600 million exit valuations for each and every one of them. That's a pretty daunting number when you consider that the typical M&A valuation has hovered in the high double-digit millions for quite some time."

It is a daunting task for sure. To deliver those returns it almost assuredly requires a huge hit or two in your portfolio. So does that mean VCs need to swing for the fences? I don't think so. As Fred rightfully points out, "There are hitters in baseball, the best hitters in fact, that hit balls out of the park when they are just trying to make good contact." (Fred and Chris share a love of the baseball analogy). The power hitters are the guys Chris is trying to back. And those are the guys who will deliver the best returns.

For more great insights into the VC and Private Equity markets, you should definitely check out Chris Douvos's blog. This is stuff no one has blogged about before, and certainly not in such an entertaining way -- another fantastic addition to the blogosphere.

When I first started talking to my now-partners about joining August Capital, I was stunned at the slow pace of the conversation. I couldn't imagine how it could take months to make a decision about whether or not to invite me to join the partnership. Admittedly, I wasn't coming from the most conventional background to enter the venture industry. But over the course of months, the August partners had more than enough time to talk with pretty much everyone I'd ever met in my professional life (plus a few choice grade school teachers while they were at it). In the end, after four months of grilling, I was invited to join August Capital.

At the time, I remember thinking to myself "how could it possibly take four months to decide?" It seemed like an absurdly long process. Yet, having now been in the venture business for some time, and having been on the other side of that process, it is amazing to me that it didn't take longer. Why is that? Two things in particular strike me.

The first is that partnerships are small, delicate creatures. At August, there were only four partners when I joined. That's not very many people. And partners spend a lot of time together. We make collective decisions about nearly all things in the partnership -- from investment decisions, to personnel decisions, to culinary decisions. And we each serve as a reality check for the rest of our partners. So keeping a partnership functional, let alone collegial, is tricky business. Rest assured, adding a new partner can throw off that balance really easily.

The second challenge is that adding a partner is a much bigger economic decision than making an investment in a company. I don't mean it is an economic decision in the sense of sharing the economics of the partnership. But rather, it is an economic decision because each new partner will be responsible for making a set of investments out of the partnership. If you make the right decision, your new partner will make investment choices that accrete large returns back to the partnership. But if you make the wrong decision, your new partner could easily invest tens of millions of dollars in companies that ultimately fail, hamstringing the overall fund returns. So adding a partner is a bit like making an indirect bet on a bunch of companies -- getting it wrong will have a widespread impact on your fund performance.

Given all that, the decks are stacked against anyone joining a venture capital partnership. It is just too easy to find reasons to say "no." Which is why it absolutely thrills me to welcome Howard Hartenbaum to the August Capital partnership. Howard has successfully run the gauntlet and come out the other side, and we are already enjoying the benefits of Howard's perspective and approach. Howard is simply a fantastic guy, and we are lucky to have him join us.

For those of you who don't know Howard, here are a few quick thoughts on why he's such a great fit for us at August.

First and foremost, Howard is a geek. After graduating from MIT, Howard didn't join an investment bank; he joined Honda Motor Company where he served as an ergonomics engineer. He got to build awesome products like the NSX. If there is one thing we like to do at partners meetings while eating lunch, it is talk about cars. Cars and email. Cars, email and digital photography. Cars, email, digital photography and high speed wireless. Cars, email, digital photography, high speed wireless and smart phones. Cars, email, digital photography . . . you get the point. Howard is a welcomed addition to the conversation.

Second, Howard firmly believes that the most important thing in a start-up are the founders. Howard has a great track record of working with entrepreneurs to help them bring their vision to fruition. As a result, entrepreneurs love Howard because he is helpful without being overbearing. What's more, Howard was an entrepreneur before becoming an investor. So he's been on both sides of the table and can bring that perspective not only to his portfolio companies, but also to our investment decisions.

And third, Howard is a great investor. Prior to joining us at August Capital, Howard was a General Partner with Draper Richards. He has invested in dozens of interesting technology companies. Notably, Howard was the very first investor in Skype and got involved in the business on the company building side (Howard was active in Skype's global business development efforts and served as the GM of Skype's US business). Howard was also an investor in Photobucket and Bebo, among many others. Howard's track record is impressive and it hasn't gone unnoticed -- he was named to the Forbes Midas List in 2007.

Given all that, it only took us a few months to invite Howard to join us at August. After all, we had to find time to talk with Howard's EE professors and his chess team coach :) We consider ourselves very lucky to have Howard as part of August Capital. He is a fantastic investor, a geek at heart, and a great guy to hang out with. What more could one ask for?

For the last several years there has been a lot of talk on Sand Hill Road about investing in China. To a certain degree there has been a lot of talk about all the BRIC countries -- Brazil, Russia, India and China. But the most excitement is clearly around China. (Interestingly, while India is a relatively close second, I have yet to hear of a single Bay Area VC exploring investment in either Brazil or Russia). Drawn by huge markets and a rapidly expanding economy, American VC's are heading to China to stake their claims. Go East young VC's. Go East.

Venture Capital investment in China has not, however, been a headlong dive. Bay Area VC's seem to be sending over exploratory parties. By way of example, David Chao from Doll Capital has been in and out of China for some time. Now a number of his partners are getting in on the act as well. Paul Koontz from Foundation Capital spent a year in China exploring the market. And perhaps the best indicator that the Chinese market is hot is Dick Kramlich's pilgrimage to China this year. Kramlich is one of the founding fathers of Sand Hill Road -- a 25 year veteran of the venture capital business. Not one to miss out on a big opportunity, Kramlich has headed over to China for 2008 to catch the wave of entrepreneurship and, perhaps, some of the Beijing olympics. Chow, Koontz and Kramlich are not the only US VC's headed to China by any stretch of the imagination. But these high profile forays into the Chinese market are excellent indicators of the level of interest in the market.

It is hard not to be intrigued by the Chinese market. With 1.3 Billion people, you don't need a huge amount of penetration to hit big numbers. One percent of the Chinese market is 13 million people. As they say, if you are "one in a million" in China, there are thirteen-hundred people just like you. What's more, the Chinese government anticipates that approximately 300 Million people will move from the countryside to urban centers in the next decade -- that's the same number as the entire population of the United States. The combination of massive aggregate numbers, rapid urban migration (and the commensurate increase in wages) and relatively low concentrations of modernized business processes, suggest a market ripe for investment. And that is precisely the conclusion many of my brethren on Sand Hill Road have drawn.

Given all that, I was anxious to check out China for myself. And right before the new year, I had the good fortune to do just that -- I accompanied a group of Stanford Business School students on a ten day study trip to China. We met with senior executives from companies like China Telecom, Alibaba, GM China and Bao Steel, as well as senior government officials and party leaders (yes, it is still a Communist country). But the most interesting discussions, to my mind, were with the leading private investors in China. (Because my meetings with these private investors took place as part of a study trip, there was no expectation that I would blog about the content of our conversations -- thus, I have decided to exclude the names of the specific investors so as not to violate any confidences they may have reasonable expected.) These investors gave a surprisingly candid view of venture capital throughout the country -- the good, the bad and the ugly.

To the mind of the Chinese investing community, the market dynamics described above well outweigh the risks of investing in the current environment. Huge markets with lots of business white space provides for numerous opportunities for economic gain. While American investors are busy debating the degree to which the US startup market is saturated, Chinese investors are having trouble keeping up with the inflow of opportunities. The opportunities in China seem unbounded, making foreign investors starry-eyed. But despite the glories of the Chinese market -- and there is no denying that the demographic trends in China are glorious -- I heard more than enough from Chinese investors to scare me away from the market.

As an initial matter, the biggest challenge that investors find in building Chinese startups is identifying great entrepreneurs. Because there has been all but no startup culture prior to a handful of years ago, there are essentially no seasoned entrepreneurs. A few native Chinese business expats are returning from abroad to take advantage of China's increasingly open economy. But those numbers are de minimis and do nothing to staff the rest of the enterprise. Meanwhile, Chinese executives have been trained to function in a business culture of bureaucracy and Party connections -- not the fast-paced, fluid environment of the startup world. The investors with whom I met lamented the lack of qualified executives and warned about the significant challenges of doing diligence on Chinese entrepreneurs.

The second challenge with entrepreneurship in China is grounded in the laws of China. The legal structures needed to support a vibrant startup economy are, at best, embryonic. Neither entrepreneurs nor investors are particularly well protected by the Chinese legal system. One investor with who I met on my trip described a recent situation in which he funded an entrepreneur, only to have that entrepreneur turn around and leave for business school months later. The entrepreneur assured the investor that he would be better situated to make the business a success after the two years of school. The investor had no recourse as his money left the country with the entrepreneur. In another instance, an investor backed an entrepreneur in a business that thereafter appeared to be failing. However, a couple years later when the same company started thriving, the entrepreneur informed the investor that it was not the company he had backed. The investor was incredulous. He told the entrepreneur that it was the very same company with the same team and even the same name. The entrepreneur assured the investor that it was, in fact, a different company and that he had not invested in this successful company, his investment was in the previous failed venture. Despite the obvious deception, the investor told me that he again had no legal recourse.

In many ways, venture capital in China is like the wild west. There are big opportunities, but they are not well defined and capturing their full value may well require manipulating the law to your own devices. One investor with whom I met described entrepreneurship in the United States like a zoo and entrepreneurship in China like a jungle. In the United States, he said, while there is always a lion next to you with sharp claws, driven by self-interest, there is a cage between you and the lion to keep you safe. You can count on the cage to protect you from unreasonable or illegal behavior. In China, on the other hand, there is no cage between you and the Lion -- if you don't take great pains to protect yourself from the self-interested behavior of the lion, you are going to get bitten. Case in point, one Chinese executive with whom I met on my trip described how he was able to leverage his dominant market position to force his competitors to sell at a discount. What's more, the entrepreneur described with pride that once he had bought up all of his competition, he was able to raise his prices three-fold.

Yet another significant challenge for United States VC's seeking to invest in China is the government itself. While China appears to be making huge market-driven strides in its economy, there remains a significant wild-card in all business transactions -- the Communist government. On my trip it was repeatedly pointed out to us that government officials don't make laws, Party leaders do. The government officials are tasked with managing the bureaucracies of their localities, but the party leaders are tasked with making the decisions. The Communist Party single-handedly makes all of the rules in China. For example, by mandate of the Party, no Chinese financial institution may be majority-owned by foreign investors. Thus, the fasted growing segment of the Chinese market is off-limits to foreign investment. What is to stop the Chinese government from making similar mandates in other market segments? This lack of predictability of the fundament legal underpinnings of business in China is sufficient in and of itself to make me take pause.

I thoroughly enjoyed my visit to China. The shear scale of Beijing and Shanghai was absolutely stunning, as was the velocity of the growth in both cities. And the extraordinarily candid conversations we had with Chinese business leaders and Party officials was both surprising and invaluable. But rather than leaving China emboldened to invest in their great economy, I returned to the United States surprised that my fellow VC's could accept the risks inherent in investing in China. I could not. And I don't anticipate that changing any time soon.

When I first met with the team at Splunk, they were working away on building a system that could accurately track a transaction as it traversed the entire enterprise stack. If the transaction broke somewhere along the way, their software could help IT discover the cause of that failure. While it was clearly a pain point for some businesses, there was no clear customer and the value proposition was a relatively hard one to articulate. But the technology they were building created a whole lot of intelligence built on the fumes of the data center (namely the log files). I was interested in what they were doing, but not interested enough to fund them. One day I got a call from Michael Baum, CEO of Splunk. He told me that they had "figured it out" and that we should meet up. I was certainly game to hear what they had figured out and we got together again a short time later.

So what had Splunk figured out? They had figured out that if they could track, manage and correlate log files across the entire data center in near real time, that they could create the killer IT Search Engine that would allow an end user to see into their enterprise stack in a way never before possible. The Splunk guys showed me a very simple example using Voip data and how one could track all systems that touched a particular extension by simply searching for that extension in the Splunk engine. I was an instant believer -- it was clearly a better way to manage the massive amounts of IT data that exist in enterprises today. I invested in the Series A and the Splunk team got to building the software that they had envisioned.

A short time after investing in Splunk, I was meeting with a group of managers from one of August Capital's biggest Limited Partners (the folks who invest in our fund). I was describing for them what Splunk was planning to build and they asked me "so what's the market size for that?" I quickly answered as best I could -- "I have no idea." Needless to say, this was not the most satisfying answer they had ever received and they stared back at me with a look that suggested perhaps I should come up with a better answer. But the reality was that I didn't have a better answer. Not because it was unclear if there was any market for what Splunk was building. But, more importantly, because once Splunk had built their search engine, it was unclear what market they would go after. I explained to my investors that Splunk had a number of multi-billion dollar markets in which they might play (management, compliance, BI, security, capacity planning, development, etc.) and the only question was which ones they would choose to go after first.

That conversation with my Limited Partners was over two and a half years ago. And since that time, the Splunk team has built precisely what they promised -- a large-scale, high-speed search technology for your data center. But despite the fact that Splunk's software has been downloaded by over 100,000 users and despite the fact that there are now more than 350 paying enterprise customers (including 21st Century Insurance, BEA, British Telecom, Catholic Healthcare West, Chicago Mercantile Exchange, Comcast, Dow Jones, FedEx, Fiserv, GE Consumer Finance, LinkedIn, Mantech, Mozilla.org, NASA, Shopzilla, Telstra, U.S. Department of Energy, U.S. Department of Justice, U.S. Department of State, Vodafone and Yahoo!), I would still have a tough time answering the question posed by my Limited Partner.

Splunk has not built an application. Nor is Splunk merely selling software. Splunk has created a software enabled platform that continues to be extremely broadly applicable. Is Splunk mission critical when it comes to maintaining availability of large scale enterprise systems? Yes. Is Splunk invaluable in the fight to maintain the security of your data center? Yes. Does Splunk uniquely simplify the process of data compliance? Yes. Can Splunk help you dig into your data and analyze it like no other solution? Yes. But, frankly, that's just the tip of the iceberg -- once you are able to query individual pieces of data across your entire data center in real time, the applicability of the platform is limited only by the creativity of its end users. And those end users are driving value back into the platform, creating applications we hadn't thought of before.

So what is the market for Splunk? i still couldn't say for certain. But I can tell you one thing -- it is awfully big. And in the venture business, that's big enough.

With great admiration, I have been watching Chris Anderson's book "The Long Tail" hit the New York Times best seller list and dominate the scarce business book shelf space of the brick and mortar bookstore world. The Long Tail is not just a geeky concept for the O'Reilly crowd, it is now a mainstream driver for the Business Week crowd. And while no longer an absolute requirement of every consumer internet venture pitch (and pretty much every enterprise pitch for that matter), the idea of the long tail continues to permeate many, probably most, of the PowerPoint presentations I see on a daily basis. Chris deserves great credit for simplifying and contextualizing a concept that plays such a big role in the evolving connected economy.

Continuing in his role as shirpa of the new economy, Chris has moved on from the Long Tail to a related but distinct idea that he is calling the Economy of Abundance. In a talk he just gave at the PopTech conference (a fantastic event in the unbelievably beautiful but remote town of Camden Maine), Chris described this new economy. The basic idea is that incredible advances in technology have driven the cost of things like transistors, storage, bandwidth, to zero. And when the elements that make up a business are sufficiently abundant as to approach free, companies appropriately should view their businesses differently than when resources were scarce (the Economy of Scarcity). They should use those resources with abandon, without concern for waste. That is the overriding attitude of the Economy of Abundance -- don't do one thing, do it all; don't sell one piece of content, sell it all; don't store one piece of data, store it all. The Economy of Abundance is about doing everything and throwing away the stuff that doesn't work. In the Economy of Abundance you can have it all.

The same businesses that are the poster children for the Long Tail, are the poster children for the Economy of Abundance. And the same businesses that are the victims of the Long Tail are the poster children for the Economy of Scarcity. With bandwidth and storage approaching free, iTunes can offer three million songs (P2P offers nine million). In contrast, with limited shelf space, Tower Records can only offer fifty- or sixty-thousand tracks. The end result, consumer choose abundance over scarcity (something for everyone) -- Tower Records gets liquidated while iTunes grows dramatically. Television is undergoing a similar transformation, from scarcity to abundance. TV initially consisted of only the major networks. Consumers were limited to 3 choices in any given time slot. With cable the number of channels was dramatically increased and a broader range of content became available (Food Channel, Discovery Channel, ESPN, CNN, etc.). To many, 250 channels may constitute sufficient abundance as to approach infinite choice in their minds. But the true television of abundance is YouTube. With unlimited bandwidth and unlimited storage, television is subject to microprogramming -- millions of shows, viewable on demand at any time. Now not only should NBC be worried, so too should be Comcast.

Unlike the Economy of Abundance, scarcity requires that businesses make tough choices. The Economy of Scarcity is a zero sum game -- new offerings necessarily replace old. Take, for example, Blockbuster. With DVD choices limited to the inventory that fits on the store shelves, the arrival of each new release necessarily displaces some DVD that the day before was available for rent. In contrast, Netflix has no shelf space limitations, thus the arrival of new releases need not replace the old. Blockbuster's user-base continues to wain as consumers prioritize choice over immediacy. And, of course, with the holy grail of movie abundance coming soon -- Rhapsody-style video on demand (made available courtesy of unlimited bandwidth and storage) -- both shelf space limitations and concerns about immediacy will be eliminated. Business owners forced to make choices about inventory are necessarily at a disadvantage. Even the best corporate buyers get it wrong and don't pick the year's hot color of Kitchenaide or the movie that outperforms its box office on the video store shelf. Meanwhile, businesses driven by abundance can make all SKU's available and need not fall victim to poor choices.

The Economy of Abundance allows business owners to defer choices to the end users. What better way to find out what consumers want than to give them everything and see what they actually buy. That is the paradigm of abundance. Why get your news programmed by CNN.com when you can have your news bubble up from the collective wisdom of end users at Newsvine or Reddit? Why get your television programmed by CBS when you can leverage the collective wisdom of the web to find great shows like Lonelygirl15 or Ask a Ninja? No longer will the success or failure of content be dictated solely by the Economy of Scarcity (e.g. Walmart). Rather, it will be dictated by the will of the consumers, as empowered by the Economy of Abundance.

Much like the Long Tail, the idea of the Economy of Abundance is not prescriptive. It does not tell you how to run your business. But it points to another significant force at work in the new economy and suggests that entrepreneurs should think creatively about how their businesses might be transformed by utilizing abundant resources in a disruptive way. Like the Long Tail before it, I suspect that I will be seeing the Economy of Abundance permeate the presentations that I see in the coming months and year.

In response to my last blog post about the startup ecosystem in Europe, my good friend John Girard, CEO of Clickability, sent me the following thoughts:

Here's the flip side: when you have a little too much help, you do more harm then good. Two examples: (1) small business subsidies don't work and (2) "incubators" suck.

You can see evidence of #1 in a lot of Europe. It's not that they don't want start-ups, but they have gone about seeding them in a bass-ackwards way. Money given away to small biz is money thrown away. They haven't figured out the incentives yet in any real way.

For #2, look at the incubator craze in silicon valley in 99/00. Granted there was a lot of air in a very big bubble, but my pet theory is that incubators made it far *too* easy for companies to start-up, and as a result otherwise good, capable companies tanked.

The reason: it just wasn't painful. And without pain, there is no resourcefulness. And without resourcefulness, there is no growth. I remember going to a meeting with a semi-competitive company back in 2000 that was being "incubated" and seeing all of the aeron chairs and the foosball table(s) and thinking "these guys are screwed." And in fact they were. . . Meanwhile, we were eating top ramen and had 9 people working out of a $1500 a month apartment in the mission (where 3 of us were also living). Now we're not microsoft yet, but we have certainly outlasted those other punks :)

There is little question that John and Clickability have done a great job of making it through the nuclear winter that was the early 2000s and building a meaningful and growing business while many of their competitors, incubated or otherwise, have disappeared. But I have a different theory about incubators.

It isn't necessarily a problem that incubators make things too easy for startups. The problem is that they don't promote true independence. It is one thing when an incubator provides fungible services (accounting, HR, etc.) to its companies. It is another thing altogether to provide help with core functions like strategy, business development, engineering and the like. These are critical skills that each startup requires, independent of the incubator. Yet, often times, those areas are supplemented by resident executives from the incubator. Sure, those execs may do a great job in the roles, but they will not be members of the permanent team and are therefore doing a disservice to their incubated companies by playing any core role whatsoever. When it comes time for the baby bird to leave its incubator nest, it won't actually know how to flap its own wings and, rather than soar, will fall like a rock.

Regardless of what are the true failings of incubators, I ultimately completely agree with John. Traditional incubators and economic grants can do more harm than good to a startup culture when there is not already a well-engrained and robust entrepreneurial ecosystem upon which these startups may grow and thrive.

I spent last week in Europe meeting with entrepreneurs in Amsterdam and Paris (it is a tough job but someone has got to do it). I met with some very smart people who are working on interesting projects. They are absolutely committed to their startups and are, in varying degrees, having some success in their respective markets. But I was once again reminded of the powerful impact the right ecosystem has on company building.

Starting a company is by its very nature a Herculean task. The odds are very much against you. As a general matter, people don't like working for startups, companies don't like buying from startups, building owners don't like renting to startups, banks don't like lending to startups, press don't like talking with startups, integrators don't like partnering with startups, lawyers don't like representing startups, and investors don't like funding startups. In Europe, each of these is more than a little true.

Despite some relatively recent efforts by U.S. venture capital firms like Benchmark Capital abroad and the notable recent success of Index Ventures out of Switzerland (driven largely by the spectacularly successful outcome of Skype), Europe remains more or less devoid of risk capital. It is extremely difficult to find angel investors to get a company off the ground and perhaps equally difficult to find professional investors willing to engage in venture financing. I had dinner with one of Europe's most successful tech entrepreneurs, Michiel Frackers, while in Amsterdam and he lamented the challenges faced by European startups. His answer to these challenges has been to create an incubator (Boost Digital) that provides the requisite infrastructure while focusing upon getting his sponsored companies cash flow positive in a short period of time. The advantage for Fracker's companies is that they aggregate infrastructure, publicity, administration, legal, etc. without requiring huge amounts of money to create self-sustaining businesses. But Michiel himself acknowledges the role venture finance plays in growing scale and velocity, something that is difficult to overcome in Europe.

In contrast to Europe, the San Francisco Bay Area and other startup centers throughout the United States (Boston, Austin, Seattle, DC, etc.) have strong institutions that support company building. For example, in the Bay Area, along with a robust angel community and Venture Capital industry, there are law firms that actually like representing startups (Fenwick, Gunderson, Orrick, Perkins, Wilson), banks and venture debt firms that actually like lending to startups (Silicon Valley Bank, WTI, Lighthouse), building owners that actually like renting to startups (all of South of Market seems geared towards startups today), accounting firms that actually like auditing startups (nearly any Big 5 Bay Area branch), PR firms, Integrators, staffing firms, etc. etc.

Starting a successful company in the Bay Area remains a Herculean task but at least you get a little bit of help along the way. The first city in Europe that can nurture that same ecosystem will become the region's center of entrepreneurship. Amsterdam is working hard to become that center and they may just succeed while London isn't looking.