As the Web 2.0 networking events multiply, some grumbles are beginning to surface about the inordinate hype surrounding this new wave of startups. Paul Kedroksy from Ventures West came out of a recent TechCrunch party with a feeling of unease (Dave Hornik on the other hand disagreed). Google-watcher John Batelle followed up with an interesting take on this bubble: he says that this time the public markets and the corporate buyers are in fact being more rational than the VCs. He makes the relevant point that excess seed-stage funding distorts the "corporate failure market" and can lead to massive category overfunding -- the 200+ funded YouTube lookalikes being the classic oft-cited example.
When I think about how much capital continues to slosh around in VC coffers for early-stage investing, it becomes clear that this funding spree is not likely to slow in the near-term. Especially in Europe, where Skype-style big hits among early-stage ventures are far rarer than in the US, the sheer volume of new startup fundings feels out of synch with their aggregate exit potential, even allowing for usual portfolio fallout. Unless of course the funding bubble is followed, perhaps 3-4 years later, by an IPO and M&A bubble -- now wouldn't that be lucky?
Earlier today I was suggesting to a veteran VC friend that since it's now so cheap and easy to start companies, it will also be easy to see early on if the idea works or not, in which case a dud can be shut down within, say, 6-9 months. In other words both the funding and failure markets are today more liquid than in the past, which should be great for the innovation industry as a whole.
But he rightly pointed that cheaper technology and cheaper running costs means deep-pocketed VCs are likely to fund new ideas for longer, or at least until they really have to put cash into heavy marketing, and perhaps way longer than they ought to. So I suspect Batelle's company destruction crisis may well linger until we either find that this broad brush approach to investing works for VCs, or that it doesn't. Certainly, in the next few years, it will test VCs discipline around cutting losses early enough. And it will test the resilience of the entrepreneurs they back. Stay tuned....