A lucid analysis of the predicament facing VCs and their investments as a result of the liquidity crisis, from Techdirt/Mike Masnick. Included within is this:

Usually startups go through multiple rounds of funding, which the VC firm bakes into its calculations when doing the initial funding. That initial firm may not lead later rounds (in fact that’s rare), but it usually will participate, and now that may be more difficult. That could cause some VCs to push their portfolio companies to sell off or close up shop much faster than they normally would.

The statement assumes there will be buyers around, and while that may be I suspect the spread between arms-length exit price (if there is such a thing) and liquidation price is going to close very very quickly now.

Mike Masnick makes great points in this regard, the best of which is (emphasis mine):

So, for startups whose strategy is to get acquired by Google (and, I should note, if you start with that strategy, you’re probably going to fail)…

I have no opinion on the specific matter. But, just the other day a colleague and I discussed the fact that since Google has such an enormous (and ongoing) investment in proprietary computing infrastructure, they might be vulnerable to “evolutionary jumps” in computing technology some time in the future.

Meanwhile, give me your kingdom, and I’ll show you yet another ad

Ashkan Karbasfrooshan gave a few good reasons why most startups clinging to what seems like the one and only business model, advertising, will soon hit the skids. The guy used to be an ad salesman - fair enough.

Meanwhile, Dan Frommer toots Tumblr’s new business model, which just so happens to be…no wait…why don’t you guess…uh…advertising? I’m pretty certain you guessed right.

Are there really that many advertisers ready and willing to throw money at what seems like a never ending and limitlessly growing supply of ad inventory? And on sites whose content is also limitless (and free), and which, when combined with their userbase, reflects so little intent to purchase?

The Techdirt folks champion the concept of giving away goods of infinite supply in exchange for goods of a finite nature (latest example here). Seems to me internet advertising might just be reaching that unlimited availability point.

Mr. Frommer says:

There’s a big future in distributed storage and computing, and Amazon (AMZN) is on the leading edge. Nimble startups benefit any time they can focus more on building their companies than building their server infrastructure.

I’ll add that some of the aforementioned companies suffering don’t have discernible revenue models (i.e. they are “working towards scale!”). It would seem that having to rely on cheap third party storage services might put a monkey wrench in that plan, at least every now and then.

Meanwhile, Markus Frind, who runs the highly profitable PlentyOfFish dating site on a quarter rack of servers (i.e. “scaling the bank account”), notes that Facebook is making heavy capital investments and coming up heavily cash flow negative as a result.

Where’s the happy median? Or has someone already patented it?

To be filed under “Fred Wilson’s Words of Wisdom“…

Look for someone who is a roll up your sleeves person who likes to engage with the other parts of the business. Look for someone who has been in a startup with growing pains before. Look for someone who can work nights and weekends. And be willing to pay them well. Because they’ll save you way more than they’ll cost you if they are good.

Quite possibly one of the most overlooked parts of building the C-level team (especially in tech, where CEOs and CTOs rule). And, that last sentence is one that most people can’t quite ever get their heads around.

People are still hurting from the tech market bubble of the late ’90s, and they have since moved on to real estate. This is a good thing - the average Joe didn’t really understand what they were investing in (and I am not sure they do now either). They cannot be held solely to blame - it was the wide-open IPO market that gave them access to those tech investments in the first place. Not any more.

Venture-backed startup valuations are on the rise, due mainly to merger and acquisition activity. Few mainstream folks have access to the private equity markets, and even fewer are paying attention to the balance sheets of those companies still standing after the crash. Meanwhile, it is the survivers gobbling up the scrappy innovators. They are using piles of cash to do it, which bodes well for both the entrepreneur and the users of the services, and we don’t have to deal with “irrational exuberance” that spoiled the last party. The investments are in the hands of those who understand the risks, and can live with the potential pain. Life is good.

***UPDATE***

But lets not get crazy. I don’t think it is a boom, but I do think the wealth (and risk) is being distributed in the right places. Then again, I am not John Doerr (obviously).

Depends on who is holding the purse strings.

World governments might be trying to dip their hands into the venture capital pie, or (more likely) they just don’t have a clue what they are talking about. What politico really does? The end result will be that they screw something up.

I suspect that most big firms won’t pay much attention to what their prevailing government does, unless one of their general partners has political aspirations. And most small firms won’t hit the radar. But it still makes sense to know where your capital is coming from.

Build your company like you mean it, don’t take any cash that is remotely related to some government - there are going to be too many strings attached. Then make it profitable and bring in the public, if your game is loving that company, and you have the will, the means and the skills to deal with those markets and all their nuances. Otherwise, sell it to one of the behemoths out there with loads of cash. You may be better off sitting on a beach someplace.

AT Kearney recently completed a study where they found top executives at manufacturers, software companies, and IT services firms were determined to concentrate on nurturing existing product lines, rather than invest in new technology development. In Poll: U.S. has conservative tack on innovation, they say AT Kearney found roughly 90% of executives were concerned about “falling behind”, but were doing little about it. If that isn’t a tech entrepreneur’s call to arms, I don’t know what is.

The problem with Corporate America is not a lack of resources or talent, but an unwillingness to take risk. Executives have little incentive to do the “next big thing.” Good.

Let the little guys build it for them. Then the corporate bigwig can buy it for 2¹⁰⁰ times 2020’s forecast revenue, take their $100K bonus for doing such a “great” job, and drive happily away to their 4 bed, 3 bath, stick and stucco in suburbia, relishing in their victory.

The risk takers, the thinkers and doers, the ones that will keep the US at the forefront of innovation leadership, will be sitting on a beach in a faraway land, sipping fruity cocktails with little umbrellas in them, and relishing in theirs.