I really love venture capital. The excitement of a new idea, the energy of getting a small team of engineers around the $30-table from Staples, and the countless hours of brainstorming on how this new idea is going to conquer the World. It truly is fantastic. This part I don't dispute.
The part that worries me is the "herd effect". Yes there is now an incubator at every street corner in the Valley, but also in every world capital. Demo days galore, excited business angels, and engaged VCs. And from time to time, someone dips in his pocket (his checkbook for the angel, his LPs bank account for the VC) and funds one of these startups. That is grand. Everyone feels good. The investor for having demonstrated he believes in the entrepreneur, and the entrepreneur for having demonstrated he can convince another soul besides his buddies that his startup has legs. But, does it?
"Legs" in today's lingo is getting revenues, not "eyeballs" like in 1997-2000. So smart entrepreneurs have found ways of demonstrating traction by showing a growing number of pageviews, a higher than usual uptake in free subscribers (the famous Freemium model), and sometimes some early revenues that validate the concept. The Board feels good. Now how do you scale it? Well...that takes a few million dollars or a trade sale.
Only startups with a broad enough concept will show early promise of having IPO potential but the majority will settle for the route to a sale to a strategic buyer. But with today's hundreds of thousands of angel-funded startups around the world, how many will truly be "eligible" to be acquired by the likes of Google, Facebook and Twitter. Where is the EXIT?
If capital requirements to launch a startup are at an all-time low, that means that exit prices are also going to be at an all-time low. So I predict that aside from a few isolated exceptions that will sell at $100M+, and few cases in the teens of millions of dollars, the vast majority of today's startups who succeed in demonstrating scalability will sell in low teens, if not single digit, million dollars. And there enlies the returns problem for Venture Capital...because that is the only number that LPs look at when they return for the next vintage...