A fascinating debate broke out yesterday, on Christmas Day in the US, between a number of prominent tech journalists, investors and founders, regarding the existence or otherwise of a “Series A crunch.”
Jason Calacanis, founder of Mahalo (soon to be Insider.com) and LAUNCH, led the contrarians, declaring that there was no such thing as a Series A shortage, that the available money for investment would expand to match the available investable opportunities and that with revenue you would always get investment. The fact that there was much less investment available than demand for that investment simply shows that there is a lack of companies worthy of investment. From his blog post yesterday:
Capacity increases along with opportunity.
VCs are a greedy lot (and us founders and GPs love you for it), and the world has mountains of money sitting in bonds, gold, corporate stockpiles and plain old devaluing C-Notes (aka cash).
If 10 companies with the metrics of Fab, Dropbox, Yammer, Uber or AirBnb were to walk into a VC firm with only the money to fund five, you know what they would do? Raise more money!
Capacity expands all the time, and it could turn on a dime.
I’m a huge fan of Jason and always find his views thought-provoking and often insightful. His point here, however, is ridiculous, or as Sarah Lacy put it in Pando Daily, “bullshit.” What fascinates me about this debate though is how classically American it is.
The view Jason is expressing is s classically neoliberal view of the world: capitalism is a perfect sorting machine, with supply (of investment-worthy startups) always meeting demand (for these opportunities by professional investors) thanks to the magic of the profit motive, the “invisible hand” that makes it all work.
This is not, of course, always the case. There are mismatches in supply and demand all the time and investment is particularly prone to herd behaviour and strongly influenced by social networks, pressures and fads. The fact there was a huge amount of money for Series A investment in 2000 didn’t mean that all (or even most) of the startups receiving that investment were investment-worthy by any conventional definition. If we can see the dotcom bubble as an example of the mismatch of investment availability and “good” startups then the reverse is clearly also true, and it’s perfectly conceivable that we could currently be in a time with the quality of startups genuinely exceeds the funds made available by Venture Capitalists.
Jason is absolutely right that great entrepreneurs can survive and thrive in any conditions, that visionary companies can create markets not simply be subject to them, but counter-examples exist for these as well: inventions which could have been (or later were) super-profitable but which no investor had the courage or foresight to back, or who had the misfortune to require re-capitalisation at the wrong moment, during time of economic uncertainty, and failed to survive, when only a few months the task would have been easily completed.
And it is also true that some mediocre entrepreneurs become spectacularly successful by being in the right place at the right time, by being lucky, having the right connections, having the money to survive long enough.
Claiming that all the ‘good” companies get funding is like claiming that all “good” bands get record deals (back when you needed one) but this is clearly ridiculous. But we know the Beatles were rejected by every major record label in London before finding someone prepared to release their music, we know that many more deserving artists never made it through the gatekeepers and plenty of other made it without their help.
The idea that capitalism is meritocratic is at the heart of the American ideology, the idea that those who are successful create their success due to their own special characteristics: because they were smarter, harder-working, more entrepreneurial. But markets matter, timing matters, location matters. As Malcolm Gladwell explored in Outliers (my favourite of his works) being in the right place at the right time (such as attending one of the only High Schools in America with an advanced computer to learn programming on, or being given computer parts by a founder of HP as a teenager), the family and group culture you grow up in and market and legislative contexts have a huge influence on who becomes a success.
Gladwell’s point is not that you don’t have to be smart, hard-working and entrepreneurial – you generally do to be a big success – but that these qualities alone are insufficient. Simply put there is a greater supply of smart, hard-working and entrepreneurial people than there are available economic winners in our societies.
And so it is with startups, and this is why many “good” companies and talented entrepreneurs will fail to raise the additional funds they need to survive this year despite the soundness and potential profitability of their ideas.
Image by davebarger made available on a creative commons license via flickr.