Harsh Lessons and an Alternative for Entrepreneurs
Few subjects seem to have captured the imaginations of the business community more than technology and entrepreneurship. As a Ventura County resident with strong involvement in both, I found it impossible to resist attending UC Santa Barbara’s March 10 conference called Entrepreneurship 101.
Having attended a similar conference last May in San Francisco, this was an opportunity to see what changes had taken place in the world of high-tech investment and to test the mood of several hundred entrepreneurs in light of the recent months of Nasdaq doom and gloom.
One of the first things I learned from the keynote speaker, Michael Birck, chief executive officer of Tellabs Inc., is that the recent downturn in tech stocks is a “disruption” and nothing new in the larger scheme of marketplace ups and downs.
Last year’s conference hosted by the investment banking firm Garage.com took place at about the same time as the beginning of the stock slide. Several trends that puzzled me then have grown even more perplexing. First, why do conferences and media reports about technology and entrepreneurs seem to be more popular than ever, especially when the economic news gets bleaker every day? A sickening number of promising start-up companies and tech-related enterprises have crashed and burned in this year’s tech wreck.
What’s most perplexing is why entrepreneurs still come to conferences like the one at UCSB and continue to struggle against what seem like impossible odds to launch companies in the face of an astronomical failure rate. Panelist after panelist at UCSB repeated the theme: Venture capital has all but dried up for Internet companies and is becoming tighter for telecom and even biotechnology companies, once the darlings of investors.
What bothered me most was the contradiction of hearing this news at a conference seemingly designed to encourage entrepreneurs and investors.
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Panelists from a Ventura Capital World panel included Greg Becker of Silicon Valley Bank, Steve Krausz of US Venture Partners, Stephen Domenik of the Sevin Rosen Funds and Standish Fleming of the biotechnology fund Forward Ventures. These are major players, venture capital groups instrumental in the launch of countless high-tech companies in recent years. The message from each, clearly stated and repeated time and again: The era of generous valuations and free-flowing investment is dead and gone.
It was amazing to see how unfazed the gathered entrepreneurs seemed to be at these pronouncements. Where did they plan to get the capital to launch their start-up companies? If what the panelists said was true, only a fraction of Ventura County’s new tech businesses will find venture capital.
And what about so-called angel money or friends and family investors? How realistic is it to expect them to help launch a new business? Most of the panelists told cautionary tales about investors from one’s family or from angel groups too unsophisticated to understand the investment.
The reality so difficult for optimists to accept is that the so-called disruption in the capital market means that it’s too late for all but a very few entrepreneurs to find significant capital to create a new business.
William Stensrud of Enterprise Partners described the investment opportunities for tech start-ups as being the worst he has seen in the 20 years he’s been raising and investing money. He maintains that the extraordinary success he had in helping launch Juniper Networks could be repeated with today’s market but that it would be much more difficult.
Rather than give up upon hearing such dismal news, Steve Cooper, former chief executive of Etec Systems, urges entrepreneurs to become involved with programs that help prepare better business plans and encourage a better understanding of the marketplace. He said there’s more than enough money to go around; it’s just tougher to get without a brilliant technology, management team and business plan.
These revelations led me to a small but important personal epiphany: that the empty feeling in the pit of my stomach resulted from the day’s overwhelming concentration on money as the valuator of the technology revolution. Measuring a revolutionary idea in terms of money alone denies the potential and benefits of technology and the new economy.
Of course an entrepreneur’s success or failure at gathering a great team and resources to work on an idea is greatly enhanced by cash. But building a business slowly from scratch with money from earned revenue and reinvestment of profits is an alternative.
It may, when all the smoke clears, be the only alternative until investors regain confidence in technology start-ups.
One positive result of this more difficult path may be a liberation from one of the new economy’s favorite mantras that has proven particularly toxic to new businesses: the exit strategy. It’s clearer than ever that new technology businesses will need to be built to last--one good idea and one satisfied customer at a time.
