Friday, November 26, 2010

Starting up without VC: the old and new normal?

In my entrepreneurship research, one of the clearest trends of the last few years is how financing for startups has dried up. Banks have tightened capital requirements, pension funds and angels lost millions or billions in the market crash, and many of the former VCs are gone.

Last week, the WSJ had a great article on the national trend that was illustrated by problems of local San Diego firm. The national statistics were grim, with new firm creation peaking in 2005, and the past three years seeing net job losses.

The article illustrates the national trend by looking at the San Diego tech industry. notes the history of tech startups in San Diego dating back to Linkabit and Hybritech

It focused on serial entrepreneur Derek Smith, founder of wireless startup Tesla Controls. It also mentioned would-be entrepreneur (and UCSD assistant professor) Deli Wang and the director of UCSD’s Von Liebig Center.

From my study of the SD telecom industry going back to Linkabit, what was striking was what was not mentioned: the new normal is the old normal. Linkabit was started by three college professors who put in $500 each (and then later got a round of angel funding to expand.) Qualcomm also started with modest funding, as did most of the 1st generation Linkabit spinoffs from 1980 to 1993 or 1994.
The VC-funded model allows for faster growth, at the risk of losing control and the company. The other alternative is is bootstrapping, which certainly require patience (and send the firm towards self-funding niches), but also allows the founders more say over the firm’s direction. Bootstrapping is also the normal mode for most startups, including most of the SD telecom startups.
Other than Enterprise Partners, San Diego has never had a sizable local VC firm. Money was readily available from local (or Silicon Valley) VCs in the late 1990s, but not really before or since. Given so few SD telecom firms reached an IPO — 11 by my last count — it makes sense that VCs would shy away from funding startups with limited options for liquidity.

The software startups will probably do fine without VC. Those that want to make something will have to bootstrap using consulting work — the way that Linkabit, Qualcomm, ViaSat and others did. Rather than chasing VC that has gone away, perhaps Connect should go back to helping firms get started — as they did when I attended my first Connect event back in 1985 or 1986, soon after Bill Otterson had founded the group.

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