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Less is More

Today's Boston Globe has an article on the drop in VC funding both in the US and especially in New England in the first quarter of 2008.  We've been conditioned to think that when some number goes down, it must be a bad thing.  In this case, I don't agree.

Sure, it's nice when the number of start-ups and the amount of funding goes up and up.  But, that only works if the number of successful exits is also going up and up.  I've been concerned for some time that the amount of funding and the start-up valuations have been rising much faster than the number and size of the VC exits.  It's healthy if there is a breather.  It's a good thing for existing start-ups as they'll have to learn how to make less money go farther, a healthy dynamic.  And, it's a good thing for new entrepreneurs looking for money.  Having the bar a little higher means that entrepreneurs have to have a better story, a more refined plan, and a more compelling advantage in order to get funding.  Not every start-up and every entrepreneur deserves to get money.  In fact, when they do, it waters down the results for everyone.

Given the high levels of funding for the past year or so, we need a breather.  To really guage the health of the start-up world, you need to look at the health of the portfolio companies, not the amount of new money funding new start-ups.  I see more start-ups finding ways to stretch their cash and generate revenues from innovative business models and interesting partnerships.  That's the real health of start-ups.

After the dot com and telecom meltdowns, start-ups found it almost impossible to get anyone to buy anything.  That made a bad situation even worse.  Customers didn't want to bet on start-ups with uncertain futures.  These days, I am seeing a resurgence of start-ups being able to sell products and services to both consumers and enterprises.  And, with increasing capital efficiency, that revenue can go farther to help a start-up grow.  In fact, if start-ups find ways to be more efficient, they need less cash, which also puts downward pressure on the aggregate funding numbers.

So, unless there is a huge long-term drop-off and start-ups find it difficult to get customers to adopt their products and services, I'll continue to think that less funding is more.

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