Why I'm Long on Startups
I have heard more smart people speak about a bubble in the startup community over the past three months than I have at any period in the past five years. And they're probably right, at least on the level of many individual deals -- valuations are out of proportion with exits and a colossal amount of seed capital has flooded the market in the past year. But so what? I have to disagree with those who claim that this imbalance is going to lead any slowdown in startup activity over the next decade. In fact, I'm extremely upbeat on the future of startup growth and innovation, even in the face of mediocre returns for investors. Here's why:
1) The developed world's unemployment rate will not decrease in the short to intermediate term. This will lead to a lot more failure -- and probably a higher total percentage of failure as less qualified people start companies -- but will generate much more innovation overall.
2) Seed-stage investors are looking beyond the returns. I don't believe that seed investment returns will be great for the next five years. But many of the new generation of seed investors view their financings as philanthropy as much as investment -- and that's great for entrepreneurs and "traditional" venture capitalists, for whom more startups funded at the seed level means more companies to fund at the Series A and B level.
3) The canon of entrepreneurship is being written now. Until recently, literature on startups was a bizarre alchemy of self-help, business voodoo and bullshit. But with people like Steve Blank, Jason Fried, Eric Ries, and many others crafting a methodology for startups backed with real data and quantitative analysis, the process of creating companies is far more accessible to newcomers from other industries.
4) Costs are decreasing, specifically storage and overseas labor. This has been written about extensively, so I won't elaborate. But it's worth repeating, as it opens startup opportunities to new people.
Who are the big winners out of all this, other than the entrepreneurs who create great ventures? Companies that can make a scalable business of supporting and encouraging innovation. Rackspace, Betaworks, startup-oriented law firms, analytics businesses and others all stand to create and sustain lucrative startup-oriented businesses. And that's a great thing, since it means we'll see even more people helping entrepreneurs -- reinforcing the cycle of startup growth and innovation.
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