Over at peHUB, Mark Suster has posted a great take on recent changes in the VC community, discussing how the bursting of what some feel is a start-up bubble will help to redefine and ultimately benefit the start-up community.
Suster starts with the familiar story of technology businesses’ previous requirements of $5 – 10million of Series A capital to get off the ground and how that cost’s decimation came first at the hands of open source software and later from Amazon’s cloud offerings. This low cost to launch has bred capital-light start-ups, which, says Suster, led to “super angels” moving up into the traditionally VC-dominated Series A launch investing space and the creation of so-called micro-VCs – all focused on investing in the same capital light start-ups as traditional VCs while there’s been rush down market by traditional mezzanine investors and hedge funds trying to get into the next Facebook early.
Suster points out that the preponderance of capital-light start-ups funded by angels, super-angels and micro-VCs in the sub $1million capital range are developing various products and searching for the elusive “product/market fit.” During this “product/market fit” search stage, Suster admits that angel/micro-VC funding is sufficient. His point is that the same technological changes that have allowed capital-light start-ups to create a product also lower the barriers to entry once that “product/market fit” is identified, so these start-ups have to be prepared to scale, and scale fast. “If they don’t,” Suster notes, “the industry titans around them will eat their lunch.”
The capital requirements and expertise in dealing with market positioning, executives, public relations, etc. during this rapid scale is precisely where traditional VCs can shine relative to other investors. Herein also lies the brick wall Suster suggests the start-up community is headed for. Over the same period that angels and micro-VCs have exploded with these capital-light start-ups, the number of traditional VCs has decreased, so we are likely to see a confluence of two factors impacting the capital-light start-ups in the near future: first, an end to the “product/market fit” runways that have started over the last couple of years (e.g., that initial $500k angel investment runs out); second, those start-ups that do hit an inflection point may not be able to obtain the bigger checks and aggressive advice needed to scale fast enough (or have already missed their window) and ultimately will succumb to the industry titans.
Suster argues that it’s this bubble bursting that will serve to redefine the investing roles, making the angels and micro-VCs gun shy and opening up opportunities for traditional VCs to focus on the scaling part of a start-up’s lifespan, rather than competing with angels and micro-VCs to fund the “product/market fit” stage. In other words, this bubble burst will provide the adversity required to make investors focus on utilizing their strengths.
This post was authored by Ryan Sansom.