Venture Outlook 2011: Returning to the Way We Were

Charles River Ventures partner Bill Tai made an interesting analogy between surfing and venture investing for the San Diego audience that gathered last week at the San Diego Venture Group’s panel discussion on the venture outlook for the coming year. The annual event usually draws big crowds, and this year was no exception. Some 350 people attended.

Tai told the crowd that VC investors had an advantage during the glory days of venture capital—10 or 15 years ago—because they could anoint an entrepreneur by simply funding his or her startup. “Syndicates could form and we would essentially own all the surf boards at the beach, which meant that we could limit the number of riders on each wave of new technology.”

But Tai said the tables have been turned on VCs in certain categories, such as the consumer Web and iPhone apps. “Now there are 600,000 new apps a year, and we can’t keep up with those kind of numbers. So now there are 2,000 riders on each wave, and they all own their own surfboards.”

Tai says startups require much less funding in his areas of greatest interest, which are digital media, enabling technologies, and Web services. As a result, more startups in these sectors are self-funded, or they are getting funding from friends, family, or angel investors. Because venture firms are no longer anointing industry leaders, Web-based industries are more fragmented—with a multitude of startups fighting to gain a foothold.

“If there are two areas I’d encourage you guys to focus on,” Tai told the San Diego audience, “it would be around mobility and cloud computing. The cost of building a company is down by a third these days and the cost of building an app is down by 50 percent.”

The proliferation of digital media and Web startups has been fueled in part by the emergence of so-called “super angels,” who invest about $250,000 individually or in syndicates, according to Peter Solvik, a managing director at Sigma Partners, which has offices in Boston and Menlo Park, CA. Some super angels are investing in companies by the score, but as Solvik noted, “super angels can’t afford to keep 200 to 300 companies going. So if you’re not in the top 5 percent of your class, it’s really hard to get a second round of funding.”

Tai’s surfing metaphor was an example of how the venture industry has changed from its glory days. But the overarching theme that Kate Mitchell sounded … Next Page »

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Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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