Technology investing, and why the bust is good for the industry Re: Corporate transparency

Jeff Bone
Tue, 08 Jan 2002 23:46:15 -0600

Owen Byrne wrote:

> What I was saying was that the model of funding that you are involved with is an aberration specific to the dotcom industry,

The environment today *is* an abberation of the dotcom industry, just as the environment of '98-'00 was.  But neither is really my mental model of how technology investing usually has
occurred:  I started and funded my first company back in 1993/1994, pre-boom, when most VCs couldn't spell "Internet,"  so I've seen the full cycle first-hand.  Believe me when I say that I
*sincerely* hope that the funding environment, after it's through overcorrecting itself and shaking out, returns to the mode it was in before the boom/bust, circa early 90s.  But no, the
general model of technology investment hasn't been as you described;  for over two decades it's followed roughly the same model with the only significant variation correlating strongly in
time with an overinvestment *into* VC funds and a flooding of the VC talent pool with folks that, frankly, probably weren't qualified.

> Basically there are two models for startup - my entrepreneurship books calls them high-potential firms and foundation firms. The first are those with potential
> for high capital gains, and are what VCs are looking for. And frankly, there should be less and less of these as an industry matures. The second are described as
> companies that "generate enough money to compensate fully those involved. And there should be more and more of these now.

True on some general level, but it misses the point relative to technology-based businesses:  there isn't a single technology "industry," and technological progress itself creates problems
that create new opportunities.  (Side note:  this model failure is endemic to academic treatments of entrepreneurship;  most B-school entrepreneurship programs don't really understand the
qualitative differences between technology and value-network driven businesses and, say, a widget-making business.  Adoption is different, value appreciation is different, etc.  This isn't
to lend credibility to any "New Economy" type of argument, it's just a simple fact:  the traditional models don't encompass a scenario where every tiny little bit of market share gained
increases the value of the market share you already had, nor does it accomodate the very real-world fact that technology breeds opportunity and demand for more technology.)

> "In the tech field, always has been, always will be." So when all the poser entrepreneurs and the poser venture capitalists are gone, the system that created
> them and promoted them will still be present. Generally when people say that its this person or that group (poseurs) that are causing problems, I generally
> think "Nope, probably the system."

I'm not sure that there really is a "system" here that can be talked about meaningfully, but rather just a massive collection of bad decisions made by underinformed and unqualified
decision-makers supporting unqualified and inexperienced people playing in domains they (VCs and entrepreneurs) knew little or nothing about.  I actually have faith that the system per se is
resilient and self-correcting.  We're going to continue to see massive and cascading effects of the failures so far, but at the end of the day the "system" learns --- LPs pour less money
into risky venture funds, the VCs that remain are much more highly selective, the entrepreneurs that remain are forced to a level of rigor never experienced by early stage companies before,
everybody starts to self-police to performance, and all the haircuts with the scooters and nudists and dogs in the office pack it in and get a real job when their dot-nothing goes tits-up.

It's a painful lesson, but it's already happening everywhere you look and its a healthy lesson in the end.  We won't see another cycle like we saw, probably anytime in my working lifetime
--- but we'll instead see a steady flow of increasingly mature and grounded companies sprout up that address real-world problems on which pricetags can be placed.  (Cf. Drucker:  every true
boom is actually a sustained growth over time, and is preceeded by about a decade by a "boomlet" that fails.  Most of the sustainable companies and most of the value in a cycle of new
industry / innovation is actually created after the boomlet.)

What we're seeing right now isn't the failure of capitalism, it's the triumph of capitalism;  the failure of various capitalists and entrepreneurs is providing us with a spectacular
demonstration of the robust and adaptive behavior of the system as a whole in balancing resource allocation where it should optimally be.

> Canada!  Why didn't you say so!
> >
> Surfing from Nova Scotia. Why do you think I do all the bitching and moaning about the US? Cause they won't let me in. ;-)

One of these days we're going to come and kick your lethargic asses, you realize that, don't you? ;-)