July 7th, 2016
(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: email@example.com
The reasons people shift startup founding and investing patterns at the end of the cycle include:
Everyone is searching for the next thing.
The period of 2004 to the 20-teens will be viewed as the era of network driven business, developer & B2B SaaS infrastructure, and the lean startup. This rich vein of innovation is not over, but appears to be slowing. As this happens, entrepreneurs and VCs go into search mode, trying to seek out other markets that have not been mined as deeply. This explosion in startup investment diversity by technology investors in my opinion is a sign of weakness versus strength in the entrepreneurial ecosystem. Tech investors are investing in food, hardware, traditional biotech, oil and gas, and other industries they know nothing about. Is this a sign of software transforming these areas, or unstated (and perhaps, not even self-aware) desperation?
Investors have fewer great organic opportunities and shift from reactive to thesis driven. Further, past success investing in one area gives false confidence to invest in unrelated areas.
Investors tend to get confident about success irrespective of whether the success was deserved or merely being at the right place at the right time. If you are an investor in great companies like Uber or AirBnB you may start to believe you are smarter then you are about non-tech driven areas and begin to invest more broadly than you should.
The warning sign is often when a large portion of venture firms shift from entrepreneur-driven to thesis-driven. There are a handful of venture firms that are always thesis-driven, for example Union Square investing in network driven businesses. However, most venture firms are admittedly reactive – they do not have a specific theme they are driving themselves, but rather respond to where the best entrepreneurs are creating the most high growth, high margin, companies fastest.
When lots of VC firms shift into a thesis driven mode, it is usually a sign that organic entrepreneurial activity is no longer sufficient to drive that firms investments. As a result, lots of capital gets invested in areas that do not merit the investment, there is a flurry of activity that looks important (Cleantech), but ultimately this activity does not yield great returns. Typically these areas are ones where the investors lack real expertise.