There was recently an article in PE Hub (that’s Private Equity Hub, for those of you who don’t subscribe) about the breakneck growth of internet darlings like Groupon, Zynga and LinkedIn, and about the massive hiring and marketing spending required to support that growth. Written by the ever insightful Connie Loizos (disclosure: I know Connie and her husband both socially and professionally), the article pointed out that these companies are forced to raise huge private equity rounds (as in hundreds of millions of dollars) to pay for the marketing that drives growth and the hiring that supports it.
As Connie points out, this is a great flaw in the “lean startup” model. Sure, you can build a company with $3 million now instead of $30 million. Open source software and cloud hardware resources allow you to bring a product to market without raising gobs of venture money. But those same trends allow anyone else to bring a competing product to market just as cheaply. So then the race is on to see who can grow the fastest. And that race demands capital, lots of it.
So startups can be lean, but growth companies are fat. All this trend has done is move the locus of capital raising competition a little later in the lifecycle of companies.
One of the hot new trends in Silicon Valley is the “virtual” company: a firm where everyone works from home, only coming together for the occasional meeting at Starbucks. This can be a great thing, part of the lean startup trend. Obviously, saving money on rent and furniture and the like allows a company to get farther along before it needs to raise capital.
However there are also special challenges for virtual companies. I am consulting for two of them now, and I’m seeing some of these challenges first hand. These challenges primarily stem from the difficulty in communicating at a virtual company. With employees spread out, communication is usually via email or IM. These are mediums that tend to promote brief, sometimes inconsistent, communications.
Sometimes when “discussing” an issue with my clients there will be 15 or 20 emails, each only 1 or 2 lines long, with multiple people chiming in, often with their missives crossing each other, and thus not incorporating other thoughts and comments. It can be difficult in this environment to drive toward a conclusion, particularly if you want any kind of consensus. Ideas and concepts are more likely to fall through the cracks. Email can be super efficient, don’t get me wrong, but it can also make group communication less effective than it would be if everyone were together in same space.
A possible consequence of this sort of fragmented communication is that it makes solving difficult problems more difficult. A virtual company is likely to be better at solving problems a single person can tackle than at solving problems requiring cohesive group effort. Based on my consulting experiences, this is true whether the problem is technical or business oriented.
Technology can help mitigate these communications challenges. Skype and other services provide free conference calls, so you can at least communicate in real time. Web conferencing and virtual whiteboards can replicate meetings, and project management software can help ensure that everything gets done on schedule. But if the management of the virtual company isn’t aware of the communication difficulties and does nothing to address them, the company is likely to generate fragmented products or strategies.
Both the Wall Street Journal and TechCrunch recently wrote articles about the new breed of “super angels” in Silicon Valley, individuals who are aggressively investing in technology startups, often in amounts large enough that they are starting to squeeze out traditional venture capitalists.
TechCrunch states that this movement is enabled by the rise of the “lean startup,” in which companies use new technologies to reduce their costs:
“But the last several years have seen the rise of the cheap startup. Internet startups can use open source software and new scripting languages to ship products fast and cheap.”
That’s true, but only for a certain segment of technology companies. Sure, consumer internet companies can leverage these new technologies and launch without gobs of capital, but much of the technology world doesn’t have that luxury. Any company that produces hardware is in a different situation. Chips, devices, networking appliances – these guys all need just as much capital as they ever did. And even folks working on software for the enterprise are still somewhat tied to the old ways of building products.
TechCrunch tends to see Silicon Valley as consisting solely of web startups fueled by former Googlers, but there are still entrepreneurs out there working on traditional products. So before you start writing the obituary for venture capital, remember that consumer internet may be fun and sexy, but there are plenty of technology companies that still need the sorts of resources only large funds can provide.
Posted in Business, Technology
Tagged angel investing, Business, dave mcclure, google, internet, lean startup, ron conway, super angels, Technology, venture capital