|
||||||||
|
|
| Message to Entrepreneurs and Incubators | ||
| Today's venture capital model is badly broken. The problem is the way the urban coastal VC business process works: hand an entrepreneur $10 million to build a business fast, go public in 2-3 years, and pray for a $500 million valuation on the first day as a public company. | ||
| Home-run baseball is the only game the large VCs in Silicon Valley, Boston and New York know how to play---or can play. | ||
| Consider the math: A typical premier VC firm may have 10 partners and $1 billion under management. Thus each partner manages $100 million. Each partner must parcel out his or her $100 million over five to seven years, or $15 million to $20 million per partner per year. | ||
| Under such a structure, it's impossible to make hundreds of $100,000 investments, or even dozens of $1 million investments. Instead, these big-time VCs are forced to make $5 million investments and swing for the fences. Realistically, maybe only 2 of the 10 investments will succeed, but the winners can bring in as much as $100 million or more. In order to hit home runs, the VCs must invest in startups they believe they can take public in a few years. | ||
| But what are the odds of this happy outcome? A lot worse than before! Far, far fewer IPOs have been rolling out the pipeline since NASDAQ fell off its 5031 perch in March, 2000. According to Venture One, there were about 250 venture-backed IPOs apiece in the boom years 1999 and 2000. Since then, Venture One says no more than two dozen per year. Maybe 2004 will produce 30 or 40 IPOs, and go down in history as a mini-bumper year. Maybe. | ||
| If build-to-flip is your entrepreneurship model, then by all means stay close to the urban coastal VCs. But if build-to-profitability is your goal, you will do better starting your company where costs are low but talent flows. Think university cities strong in science and engineering: cities such as Madison, Bozeman, Columbus, Fort Collins, Austin and Athens. There are several other cheap high-IQ cities such these. Based on my research, I believe such cities will be the rising stars of the 2000s. | ||
 |
|
|
|
