where do we go from here?

ImagesIn the mid-90's the age of the Internet was just beginning to rear its head in NYC.  It had been percolating but it was really the mid-90's when we started to see an onslaught of businesses that were going to supposedly change the way we lived on the Internet.  Changed the way we live from where we shopped, the ads that we watched, the way we consumed information, etc.  The amount of money that needed to be invested in order to actually ramp these new businesses was big and it could take up to $50M to even get them humming. Yet there were not that many so money was out there in force. Most of us knew there was something of value on this thing we all called the world wide web but very few really understood what this supposed Internet would become or how mobile would become the real killer app.

Then the bubble burst.  It burst big.  Many of those next big thing businesses went belly up or their valuations went plummeting down to the ground as everything began to dry up.  People left the industry and never returned, others moved cities and on to new opportunities, some went on idle trying to figure out what came next because they were the believers. 

A few years later a breed of new people started to create different business models.  With those models came the next generation of engineers and techies who developed ways for companies to grow their models on open source products.  The products gave a whole new meaning to the cost of growing a business.  It wasn't that much anymore.  You didn't need millions upon millions to start a business.  It took a few years but eventually it became so easy to take an idea and start a business with not a lot of cash that you could actually get family and friends to put in enough cash to launch your new idea.

Then came the onslaught of incubators.  The economy needed a shot of new blood.  If we can mentor as many ideas that people want to build on the Internet then we can truly change the way we live our lives.  We will be the Internet revolution and hundreds of years from now people will look back and say it was that time in early 2000's when everything changed.  Let's incubate as many ideas as possible, give them a little money because we can and let's see what sticks.

The first concept of how to choose a successful idea was to see what gets traction.  If you can build a company that gains traction and tons of eyeballs then you can certainly figure out how to get more money to turn the company into a real revenue driving model.  Makes sense.  But the concept of throwing as many darts into the wind as possible took a turn.  What happened is because of the small amount of cash it takes to start-up a business lots of people jumped into the game.  Those people, like myself, are called angel investors. 

Here is the tricky part.  Once companies begin to scale and there are tons of them, who is going to fund them all on their next round?  There might be tons of angels but there are a limited amount of VC's.  VC's might only do ten deals a year others do 20 but none do 300. 

So, where do we go from here?  Maybe this is the turning point, the fork in the road where the start-ups that are being created, the apps that are being built really need to have proof of their revenue model.  That means that eyeballs have to really show that they can create money.  Does that mean that more companies will become business to business models because there is more cash there, does it mean that more companies will figure out quickly with friends, family and angel money that they can scale with that alone although slower but enough to create a solid $20/50 million a year or does it mean that most of these businesses will just fall off the side of the map.  We shall see.

I don't know the answer but seeing hundreds and hundreds of investors put money into start-up businesses each year with the hope that they will succeed.  Just because they are succeeding doesn't necessarily mean they will get funded which is not a good thing.  That is not a good economic model.  Too much supply with not enough demand.  Many won't get the next level of funding because they shouldn't or they are not part of the "club" or whatever the supposed reason are.  This will push the tech industry to look at new models.  What they are, not sure but I believe we are at that point of thinking….where do we go from here. 

Comments (Archived):

  1. Carol Sacks

    Very thoughtful column, Joanne.

    1. Gotham Gal

      thanks carol.

  2. Rohan

    We need to get rid of the ridiculous notion that everything is about growth. There are limits and we will hit them soon enough.I think now, more than ever, things will gradually cease to be about growth. It’ll be about sustainability and viability.Just as we will look back at these times as the period of the internet revolution, the crazy betting on the financial system and investments in the tech sector could very well be thought of like the California gold rush.

    1. Gotham Gal

      i like the analogy to the california gold rush. you could be right.

    2. Kirsten Lambertsen

      Yes. Thank you. Not everything needs to or should grow forever. Sustainability is elegant.

      1. falicon

        agree…as long as it’s sustainable, healthy, profit…Perhaps the better/next model is in businesses that earn the friends, family, and angel investors a healthy dividend year-after-year rather than a big one-time cash out at IPO or acquisition…in that model, perhaps the need or desire for follow-on investing via VC and larger rounds is actually viewed as a bad thing (though the annual tax issues of a healthy dividend might also make this concept tricky — just rambling thoughts out-loud I guess)

        1. Cam MacRae

          One thing that really peeves me about income investing in the US is the absence of dividend imputation. In an ideal world a dividend comes with a franking credit for the company tax already paid, thus avoiding double taxation.

        2. Kirsten Lambertsen

          “…just rambling thoughts out-loud I guess”: That’s the way good things are created. Make a mess and then clean it up :)Are you hopeful that crowd-funding is the first spark of this kind of new funding paradigm?

          1. falicon

            I am intrigued by crowd-funding…but at the moment, I think of it very much like a newish version of mail order…you pay for something, then wait awhile and hope you actually get it…I don’t know that it properly scales up to the amounts that most companies, especially software or tech-based companies, need…app.net being the 1st exception (and I suspect the long term results of that are going to make that path a difficult one to follow).

          2. Gotham Gal

            There is a need for funding smaller solid business models that might end up doing 10-20 million a year. Banks used to fund those. Unfortunately no longer

          3. pointsnfigures

            Thank you Dodd-Frank. It put the small guys out of business. For the big banks, they won’t take the risk because it doesn’t move the needle on profitability.

          4. Gotham Gal

            interesting. i read that the day it was published.

          5. falicon

            Good find…I just got around to watching ‘Something Ventured’ on Netflix last night as well (very interesting look at the history/birth of the VC concept)…proving yet again, the only thing that’s constant is change πŸ˜‰

    3. Cam MacRae

      Did you read @umairh ‘s new capitalist manifesto? I guess we’ll know it ceased to be about growth when a cheeseburger costs $30.

      1. Rohan

        Hahaha.. That’s a great example, Cam! πŸ™‚

    4. Marjan Ghara

      The challenge is in industries or segments where “winner takes all” or the top two or three companies can corner the market. They have economies of scale and can undercut their competition. That is specially true in online businesses. Look at how the bookstore chains, took over the local bookshops and then Amazon, took them over. For a business to become sustainable and viable in that sector is going to be very hard and if you want to compete, you need to raise a lot of money.I had heard that the toughest time to raise money is after the Angel and before the VCs and Joanne has articulated that so well and I hope new models evolve that will help those mid level start ups survive. Food for thought for sure.

      1. Rohan

        I don’t think the concept of investing is broken Marjan. I think raising money is not going to go away either.All i’m saying is that the way it’s being done now is nuts. πŸ™‚

        1. Marjan Ghara

          I agree! πŸ™‚ Will be interesting to watch how it evolves.

        2. Gotham Gal

          agreed. things are going to change.

    5. Walker

      By ceasing to be about growth but rather sustainability and viability do you mean like a local pizzeria where a very hard working bloke ekes out a modest living if he make good enough pizza for the neighborhood?

      1. Rohan

        I find it interesting that you point to the other extreme Walker.I think the answer lies somewhere in the grey. I think there will always be companies that will grow, die.. the S curves are not going to change.But jesus christ, not every company is going to be a social network with a multi billion dollar valuation about to change the world.That said, I do think being ‘niche’ will be the way to go.

        1. walker

          I was coming at from the investing perspective. I think the reason so many start up get some angel seed money and then cannot get VC money is not because there is a lack of vc interest in getting high returns on their capital, its because the start ups cannot earn the kind of returns that risk capital requires (that is why the pizza guy has to contribute so much sweat equity). The notions of entrepenurism, start ups, sustainability, disruption have become so commonplace that they have lost meaning. I am not even sure I know what niche means, not really.

          1. Gotham Gal

            i believe you are absolutely right.

          2. pointsnfigures

            The pizza guy may be able to use venues like Kickstarter to get capital. Small banks out of business and big banks ignore him. Would be interesting to see local people clamor for a pizza shop, then fund it and see if it makes it or not.

  3. AG

    Really great. Thanks!

  4. Carl Mistlebauer

    “That is not a good economic model.”In the past two weeks I have talked to three people with “old economy” business proposals; they had great ideas but lacked funding. There only options realistically were to go to a bank and get a second mortgage on their homes.At best, that gets you roughly $50,000 to $75,000, but that has been the reality of our “economic model” for entrepreneurship within the old economy for quite sometime and we are not talking about “brick and mortar” establishments here.If you actually study the data you realize that small business development has actually regressed over the course of the last 20 years and it has nothing to do with the concept of “entrepreneurial spirit” of this country. It has everything to do with banking and finance.Sorry to hear that the same trends are now creeping into the tech industry.

    1. LE

      “There only options realistically were to go to a bank and get a second mortgage on their homes.”I think it takes some creativity, just the same with dating or finding a job. If you are going to go the obvious routes you are in competition with others. If you choose to take a creative approach you are competing with nobody but your own idea or worth.You say “they had great ideas but lacked funding.”.My question is have these people approached local successful business people to pitch their ideas and try to secure funding on any terms? Or have they only gone the typical routes? As much as I don’t like the idea of dealing with attorneys there are also attorneys that will invest in business ideas.What I find many times in people that succeed vs. fail is that they do things differently, proactively and creatively and they put in the effort.

      1. Gotham Gal

        You have to be scrappy in finding the money.Lawyers with cash I have rarely seen

  5. walker

    Given that you believe that this is “the fork in the road where the start-ups that are being created, the apps that are being built really need to have proof of their revenue model and that means that eyeballs have to really show that they can create money”, I suspect Β that the answer to your question: “…does it mean that most of these businesses will just fall off the side of the map?” is yes.

    1. Gotham Gal


  6. LE

    “Once companies begin to scale and there are tons of them, who is going to fund them all on their next round? There might be tons of angels but there are a limited amount of VC’s. VC’s might only do ten deals a year others do 20 but none do 300. “Starting a business with and hoping to have a good enough idea to attract VC funding at some point and then become a large operation and wealthy simply needs to be factored into one’s decision at the start.I’m sure you remember when growing up that parents tried to push their children toward solid careers (law (well at the time) medicine) and not pie in the sky things like music, entertainment, sports. [1]Somehow that has changed.Of course if you come from a well to do family I guess it might be ok to spend your early years searching for the big success (just like if you are a Kennedy you can work at a foundation because you have something to fall back on..) But the rest out there have to seriously think about what they are spending their time on and the chance of success. Somehow I don’t think that is happening. The lure is just to great.[1] There is this live recording of Springsteen from some concert where he talks about how his father wanted him to become a lawyer and stop playing the guitar up in his room. With the result being “see my father was wrong you should pursue your dreams look what happened to me”. And by the reaction of the crowd they totally bought into that. One girl even screamed out some positive reaction. I mean sure if a million guys try to play guitar one will end up being a Springsteen. The rest will be waiting tables and playing Saturday night affairs for the people that took a solid and realistic career path.

    1. Gotham Gal

      I do not come from a well to do family. We all had to get a paid job after college graduation. We were on our own.No advice or direction in what career would be best suited to who I am. Yet trying to make a go of something like Bruce who obviously found success is the only way to see if one can make it work

  7. William Mougayar

    Yes, going from angel-funded seed to series A is very critical. But you may not have the revenue model figured yet til probably after the Series A phase.

    1. Gotham Gal

      I am not so sure that is an option going forward for many

  8. Abdallah Al-Hakim

    very nice discussion currently ongoing with this post. One of the current problems with entrepreneurship is that many people are building the same thing – for example how many photo apps can keep on getting produced? Incubators and angel investors need to start encouraging entrepreneurs to build services and applications away from the ‘hot’ and ‘cool’ trends at the moment. For example, areas like digital health and e-education and big data are ripe for innovation.

    1. Gotham Gal

      i totally agree. i see more duplication of businesses that are already quite mature on the web. doesn’t mean you can’t build a better mousetrap but i’d like to see something fresh and new vs the same idea with a minor twist.