In addition to the trends on the supply side, the demand for venture capital has fundamentally changed. We’re seeing a lot of two and three person startups that raise $500,000-$1 million in angel funding (for anywhere between 10-20% of the company). Back in the day, that would allow you to buy some servers and equipment, rent some space, and take you to the point of the initial iterations of a product. With the advent of Amazon web services, communal working space, and an increased skill set of product development (at a younger age—we’re seeing founders as young as 18), today’s team’s are cranking out products that can start generating traction and even revenue. Modular services such as Braintree, Twilio, and Recurly allow teams to bolt on functionality that would have taken months, if not years, to develop on their own.
As a result of these lowered costs and rapid development, you’re seeing businesses that have either scaled quickly to cash flow positive or to a point where they are $10 million acquisitions for larger players like Facebook, Google, and Groupon. If the founders did one angel round and still own 80% of the business, the net payout would be $8 million to be split evenly between 2-3 founders. Certainly nice scratch. If you think about that option versus the pain of going out to raise significant venture capital and getting diluted along the way, you can see why it would be an attractive alternative.
Following up on my comments a few days ago...Paul Lee offers some color on the emergence of segmentation within the start-up space. He describes a new class of (what I would call) project based start-ups. These entrepreneurs don't want to be empire builders. They don't want to take on the hassle inherent in chasing successive rounds of financing and building a massive organization. They intentionally stay small, outsourcing non-core capabilities to service oriented providers rather than taking on headcount.
If entrepreneurial activity is to take on a larger role in the future of work, the growth will come from this sort of activity. It is a very small minority of people who possess the right mix of borderline personality traits necessary to build a facebook, apple or amazon. There are far more people who possess innovative potential but lack such grandiose ambitions. These "common" entrepreneurs will see little appeal in the trials and tribulations endured by a Jobs or Zuckerberg.
A couple years ago there was a debate raging about the definition of "entrepreneur". A popular position held that the term really referred to two different types - the small business owner and tech entrepreneur. Of course, the people the VCs were concerned with were the tech entrepreneurs - the people who created scalable, world-changing innovations and built world class companies around them.
The implication was that tech entrepreneurs should resemble a Jobs or a Zuckerberg. There is however an assumption built in to this line of reasoning that was only occasionally made explicit. That assumption was that in order to produce a scalable world-changing innovation you needed to build a world class company.
The connection between those two elements grows increasingly tenuous every day. Many of the archetypal tech entrepreneur characteristics, such as the so called "reality distortion field" or overt competitiveness, are much more relevant to building a large organization than they are to creating an innovative product. The entrepreneur who is willing to source non-core functions to outside service providers, who doesn't need to control everything, can safely tone down such characteristics.
