I’m reading a lot about how the VC model is dead, and the venture capital industry is drying up. Supposedly, this is caused by the lack of conventional exits and liquidity events, meaning the venture capital funds can’t return cash to their investors. While we are clearly going through a flat spot in IPOs, and the world of acquirers is reduced, I’m not sure that implies the industry is dead. I think it’s just going through a stretched out phase.
In the VC conferences, you see graphs of how much money is going into the funds, how much is being invested in early and late stage deals, how many deals are being done and how many exits are happening. Inside the fund meetings, there is always a lot of talk about Deal Flow: how many deals are we seeing, are we seeing the best deals or the dregs, how many are competitive deals where multiple funds are bidding up the price. And in the board rooms of our investments, we talk about cash flow and burn rates. Everywhere you look, the issue is the flow of money from one place to another, and accumulating in the chosen few winners. It’s all about Flow.
I want to talk about another abstract measure of the new venture business that I call Idea Flow. What is Idea Flow? Simplistically, it is the rate at which new ideas are being generated. And what is it a function of?
Well I think it is partly a function of population growth, and the number of fresh minds entering society from the bottom, for example the number of college graduates. Each young mind is taking a fresh look at the world and seeing it from a slightly newer perspective.
In addition, I think it is also a function of how far we have gone in digesting the last few major revolutions. For example, the concept of the Internet, and frictionless communication at negligible cost, this is a revolution that is clearly still happening. When there are major revolutions percolating through society that haven’t been fully exploited yet, then the Idea Flow rate is probably enhanced.
Finally, Idea Flow is a function of whether sufficient resources are available to gestate these ideas. Maybe this should be a slightly different concept, say Manifest Idea Flow. In other words, maybe just having an Idea isn’t enough. We also need to let it bloom or it’s meaningless.
I’m sure one can identify other contributors to the rate of Idea Flow. My point here is that basic Idea Flow is clearly still growing. The number of college graduates continues to rise each year, and the population continues to grow in all but the most extreme cases of deprivation. And we have experienced at least three major revolutions in the past few decades that are still playing themselves out. Information Technology (computers, memory, programming, AI), Biotechnology (genome mapping, molecular biochemistry, synthetic biology), Communication Technology (the Internet, email, texting, cellphones), these are three overlapping general categories of revolution in process.
I think Idea Flow is the bedrock of the Venture business. Without ideas, nothing can be created. You might as well buy Ma Bell and cash your dividend checks quarterly. The Venture Capital business starts with a couple of motivated entrepreneurs, a problem that needs solving and an Idea.
I believe that in this time of economic turmoil, where cash flow and economic growth and investment capital are down substantially, the bedrock of the Venture Capital business is still healthy. If anything the current turmoil makes aspects of our economy more ripe for disruption. If the old ways are broken, let’s try a new way.
A larger number of bright young minds are emerging each year, and the ground is fertile. And today it often takes less capital than ever before to manifest an idea.
So I’m bullish on the Venture Capital business right now. While others say it is dead or broken, I think it is likely to be even more fertile in the coming few years. Valuations are down and the potential for profit is therefore up. The markets are more vulnerable to disruption. And the public investor is always interested in an exciting story of the future realized. The IPO market in some form will reopen soon, perhaps even in 2009. And large companies will emerge from this downturn with their existing market approaches damaged, and needing new ways to continue growth. They will be acquiring again.
In the end, this business is about Idea Flow, and it’s still healthy.