Perspective, Pontification and Propoganda about Entrepreneurship and Venture Capital, brought to you by David Hornik of August Capital.

« The Long Tail and Content Creation | Main | Company Building For Eight Year Olds »

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341d157b53ef013480ce4d8c970c

Listed below are links to weblogs that reference Unique Technology Still Matters to Start-ups:

» links for 2006-01-26 from medmusings
Hat tip to dr. andy: NYT - Perri Klass on "how hard it can be to separate the truly sick kid with meningitis or leukemia out from the sea of viral infections and worried moms." (tags: URI pediatric differential diagnosis NYT) David Hornik of VentureBl... [Read More]

» What issues matter to software ventures? from 52 Bicycles
I scan the internet and software VC commentariat from time to time to listen to what moneymen (and -women) think about the issues I care about. By and large a smart bunch, and Dave Hornik’s Ventureblog is must-read for me. But his recent post,... [Read More]

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Darren

David,

Thanks for the post. I would concur that from my perspective, technology is a key component of most deals done by VC's. The consumer mindset is also true as technology for technology's sake is not very profitable in the long run. I think that most VC's are being a lot more realistic than they were during the bubble and that's why it might seem that they are being conservative, but I think it is just a correction to being driven by the market.

Darren

doerrleftmepoor

This study reminded me of Bob Seger's song Old Time Rock Roll. The one that goes:


"...I reminisce about the days of old, with that old time rock 'n' roll."

And that's just what this study found, people reminiscing and wishing they were
back in the Old Days when tech mattered.

But we're living in 2006. And these days, they're playing a lot less Rock and Roll and a lot more Hip-Hop.

And one more thing, the VCs have a lot more money. And that's why tech matters less.

Here's why: In the last 30 years or so, some investors in VC funds have made a lot of money. I mean a LOT of money -- imagine having had money in the KP fund that held Google! This has caused an avalanche of money to flow into VC funds.

VC's make money in two ways: carry and management fees. Carry is the money VCs earn when the fund makes a profitable investment. Management fees are fees collected yearly and are charged to investors whether the fund makes money or not. The fee is generally 1-2% per year. In the old days, when funds were $100 Million or so, the management fee didn't amount to much. But as the money going in to VC funds has swelled, the management fees have become very significant. 2% on a $1 Billion fund is $20 Million per year! It's clearly in VCs interests to raise big funds.

But here's the problem - investing large amounts of money in new technology development is impossible. The most interesting technologies are still developed by small teams of really smart people toiling away for several years. Adding money to these kinds of efforts doesn't increase the odds of success. Nor does it make the technology come any faster. Tech development is the same as it ever was - hard, slow, and uncertain.

So what's a VC to do? The answer seems to be to spend money to push technologies that are only so-so. And spend they do. It's easy to spend lots of money to push a product - especially an undifferentiated also-ran. There's advertising to be done, distribution deals to be closed, partnerships to be shipped, sales people to be hired, etc.

And in today's world, if you make enough noise in the market, your inferior tech can win. And that's a winning strategy for VCs who want to "invest" like crazy so they can run out and raise more money...and collect fat management fees year-in and year-out.

The comments to this entry are closed.