Cash Crunch?

Entrepreneurship is in vogue. Innovators are innovating. Makers are making. But I cannot remember a time when we have gotten more inbound traffic. It is not just coming from entrepreneurs. It is coming from angels, seed investors, VCs, lawyers, accountants, friends, aunts, uncles, you name it. I’m waiting for the guy who sits at the front desk in our building to pass me a business plan on my way into the office.

Fred Wilson on the current state of Start-Up Financing

….

Fred Wilson wrote an excellent response to the WSJ article “Web Start-Ups Hit Cash Crunch” yesterday, and I cannot say it any better.

I feel as though we are in a period and time where Start-Up culture is pervasive; everyone I know has at least an idea or ambition to start ‘something on the internet’. Being connected to the internet is more or less ubiquitous at this point, and the cheap costs to actually start a start-up beckons to the illusion that anyone has the potential to start the next Facebook. Tales of internet rise-to-riches has bred an almost-viral idea that, yes, you can start something and make it big on the internet if you have a *great* idea. It’s like a dream that is virtually certain to come true.

Problem is, this ‘dream’ has spread to almost everyone. Even some of my friends, who have minimum interest in tech, have grown comfortable with this idea that you could get rich by just making a company on the internet. “yeah, you know this guy is making 30 grand a month of his website? he doesn’t do anything and just makes 30grand like that!”, said a friend just the other day.

This prompts my question: with all these start-ups popping up - how many of these start-ups are actually innovating? And how many of these start-ups are simply ‘me-too!’ companies?

The industry needs more innovation and less copy-cats. Color.com was a prime example of this ‘me-too’ phenomena, trying to cash in on the social sharing/location-based app hype of this year. And what happened? Nothing.

I’m with Fred, and all the other people in favor that there is no ‘cash crunch’. Khosla just closed a billion dollar round, so really, VC as an industry is doing just fine - thankyouverymuch. What’s really happening is natural selection - the cash flow from LPs to the funds are more or less about the same; what’s different is that more companies are competing for this money now. This means the top VCs (20% of all VCs, apparently I’ve read) will just have to wade through more mediocre start-ups to find a true gem now. On the other hand, mediocre VCs will jump into these mediocre start-ups, only to realize that these start-ups can’t either gain traction/figure out a viable revenue model/find market fit/etc. and that’s when these VCs pull out of the next round leaving these start-up founders thinking ‘Oh man, there’s just no more money in this field’.

And that’s when you’ll see me at the side-lines saying ‘Orly now ….’

Realize that we’re still producing stellar start-ups right now. Realize that the cash flow hasn’t stopped. Realize that we just need to weed out the mediocre, ‘me-too’ start-ups.