Saturday, July 19, 2008

The tech bubble's toxic legacy

An article on GigaOm caught my eye: "With Exits Barred, VCs Keep Investments Flat". In the piece, Stacey Higganbotham relates the reassuring news to entrepreneurs that VC investment in early stage companies remains strong, and that later-stage deals are being done at a historic clip -- 318 in the second quarter alone. But then she drops this little tidbit:
If those companies don’t exit within the next two to three years, VCs will have to start selling at a loss or pushing firms into bankruptcy.

Huh?! What's wrong with this picture? Any 'late stage' deal likely means a C and possibly a B round -- so the company involved has been in business for 2 or 3 years already when it raises the round; and the round should last it for at least another 18 months.

The presumption here is that tech startups don't get to profitability.

This is the worst legacy of the tech bubble, when lots of permanently unprofitable companies were started, funded, and even IPOed. It's got nothing to do with the true legacy of Silicon Valley, where superstars of past eras -- Intel, Apple, Sun, PeopleSoft, Oracle -- became insanely profitable companies. And this presumption is blinding us to what's happening in the Valley today. It's the same mistake that made you not buy Google shares at $85 in 2005, and you shouldn't let it blind you again.

I personally know of at least three highly profitable startups that may go public in the next 12 months, and may not. All three of them have been in business for over five years, and they are throwing off not just revenue but cash profit at a very impressive rate. To those three, I can add at least a dozen that I'm pretty sure are highly profitable as well, I just don't know for certain. All of these companies are the types of startups that are raising the "late stage rounds" that Stacey seems to believe must lead to exit or bankruptcy, because there is no third path.

Every startup that I've built has been intended from Day 1 not just to be transformative to its market, but to be a real, profitable business, with real customers. That's the true legacy of Silicon Valley, and the sooner we get our heads past the failed abberation of 1999-2001, the better.

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