The Changing Shape of Startups and Investing: an old(er) entrepreneur provides context and perspective you may have missed

The startup space changed over the past decade. Dramatically. Changed the way we now think about entrepreneurs, entrepreneurship and startups. Changed in the vocabulary we use and ways we think about what is important and what is not. Some of these changes may be less apparent to others than to me. It’s all about context.

I started my first two tech companies in the early ’90s, a third in 1998 and a few more after the first Dot Com bubble burst. Today’s entrepreneur, if transported to 1995, would be surprised at the number of things that are commonplace today but just didn’t exist at all.

• No Steve Blank (Four Steps to the Epiphany; The Startup Owner’s Manual)
• No Eric Ries (The Lean Startup)
• No Alex Osterwalder (Business Model Generation)
• No blogs (Feld, Wilson, Suster
• No AngelList.
• No Accelerators.
• No smartphones.
• No Google.
• No Facebook.
• No Twitter.
• No formal understanding of SaaS and SaaS metrics.
• No notion of agile development methods.
• No customer discovery.
• No business model generation.
• No product-market fit (at least not as a clearly articulated notion).
• No minimum viable product.

(Yes, we had computers. And running water. Though we did have to walk to school barefoot, uphill both ways.)

But seriously do these changes matter? And if they do, how and why? What’s better and what’s worse today in the world of entrepreneurship, startups and investing?

Here’s my view. I think these changes do matter. And I think they matter in ways that are less well-understood than they should be.

For example, if you raised money to start a new venture before 2000, you were being handed a “leg up,” a kind of instant unfair advantage in the marketplace. Why would that have been the case?

Prior to the early 2000s, the cost of starting any given new venture was significant. If you needed to build something, and almost invariably, you did need to build something, you needed office space, equipment and servers. If you wanted to start anything at all, you were going to have to raise capital. And if you did, you were better situated than those without access to capital. In other words, raising an initial tranche of Series A capital gave you a kind of unfair advantage in the marketplace. You had some (limited) time and freedom to build a product or service that could demonstrate value, and you could operate behind a wall that afforded you some protection. It wouldn’t stop a missile, but it did keep you from the situation we see today – where the hordes turn out to have had the same cool idea as you and further concluded that they, too, could “build an app for that.”

It can be tempting to believe the fall of barriers to entry should always be celebrated – like the fall of the Berlin wall. But if the cost of entering the market falls to zero, anyone and everyone could be your competition. For entrepreneurs — as Peter Thiel made clear, pointedly, in Zero to One — this is not a good thing.

Nonetheless, the barriers have fallen. The cost of creating and testing a new venture went from millions of dollars to tens of thousands of dollars. Your neighbor was your competitor. Along with everyone else’s neighbor. Why did that matter? Let me count the ways.

1. People started to think that startups were an easy path to wealth. They aren’t.
2. More competition in a given space is more noise in the system. As the noise increased it became harder for investors to get a clear read on who would be successful. Why did this matter? Well, it caused many early stage investors to rethink their approach. If you can getter a better read on who is going to win by waiting a bit, it makes little sense to jump in early. Investors started to invest later in the game.
3. As more investors waited to invest, a gap opened up. Angels, super angels and accelerators rushed in to fill it. And after some initial concern, established venture capital firms were happy to see this. Why? Because as they raised larger funds, they needed to put more money to work than was reasonable in early stage investing. Just as it had become less expensive to start a new venture, the large venture firms were sitting on much larger funds and were raising new funds more frequently. They needed bigger opportunities. And they needed these opportunities to be less risky.

Are we better off than before? As the cost of entry has declined, are we able to say that more value has been created? And if it has, who has captured more of that value – entrepreneurs, early stage investors, late stage investors, the market?

It seems clear to me that low barriers to entry create many more market entrants. It follows that the early stage landscape in most areas is far more competitive than it once was. Greater competition means more risk and less value for any given new venture. On the whole, capital seems to have moved to a later stage to avoid having to bear this risk. Which means, of course, that early stage entrepreneurs (and their friends and families) are now bearing more of this burden. I haven’t seen enough discussion of this over the past decade.

When I raised $1 million to start Service Metrics in 1998, I had sufficient runway to hire a team, build and test a product and raise a follow on round of Series B capital. But even that first million put me and my team ahead of nearly everyone else in the market, giving us an advantage that we could build on. Those days are gone.

So where are we now? Investors don’t have any confidence they can pick winners at the earliest stages of a venture, so many of them have moved later stage. If the start of a new venture is like the knot in a bowtie, many investors have moved to the right — they’ll take a look after the venture has been vetted by a Y Combinator, TechStars, 500 Startups or [insert hundreds of other accelerators here]. Most of the risk in early stage startups has shifted to entrepreneurs and their friends and families. This where we sit after 10 years of “lean” startups, “customer discovery,” “product market fit” and accelerators.

Today the real opportunities for startup disruption / and value creation are on the left side of the bowtie – before a new venture is formed.

I’d like to hear your thoughts.