The VC Debate: Boom, Bubble and Bust

We were in Galveston at a wedding this weekend, so other than my cautionary post on Saturday morning I missed a good bit of the big VC Debate.

I’ve been catching up on my reading, and here are my thoughts on what some folks are saying:

Mark Evans: Makes a good point that, while there are some bubble signs, we need VCs to shepherd the companies through the monetization process and provide a level of comfort to outside investors. I agree with this as long as the VCs don’t get caught up in the madness of the greater fool theory and rush a bunch of companies to market that have no way to turn their ideas into a profit. This happened far too much leading up to the last dot.com bust. And as an aside, online ad revenue by itself does not a business plan make.

Mathew Ingram: Says that the VCs didn’t create the bubble and that as a practical matter, we can’t simply take the middleman away under our current system. He also says, and I heartily agree, that the smart investors who might otherwise serve as a balance against another bubble in Dave Winer‘s new market proposal didn’t exactly distinguish themselves the last time around. They didn’t, although the people who really got killed last time around were the retail buyers of stocks and mutual funds. Most of the insiders and big players made out like bandits. And while I technically agree that bubbles are built on the demand side, there is a huge machine in place designed to create that demand- both at the IPO and before. So while the VCs are not the creators of the greater fool theory, they certainly profit from it. And a greater fool will do wonders for a bad business plan.

Scoble: Points out that there is more access today via the sort of communication engendered by free conferences, blogs and other new media. I think that’s true but the roads out of all those small meeting rooms still lead to the existing market structure. Things may be better now than then, but the system to turn an idea into a ton of cash is the same as before.

Rick Segal: Good, thoughtful post on the place, purpose and challenges of the VC industry in 2006. I like this quote (other than the fact Kent Newsome isn’t in that listsmallicon-793225).

My working theory is that a Capital firm with Esther Dyson, Mark Evans, Shel Israel, Doc Searls, Robert Scoble, Dave Winer, or some combination, might have value that, along side my money, could bring ideas into the mainstream in a much different fashion with great returns for all.

AS LONG AS the all includes all the retail buyers should the deal go public. Too often those folks get forgotten about.

Anne 2.0: Says that Web 2.0 won’t give the super-sized returns needed to get the attention of traditional VCs. This is the best point yet, and I hope she’s right about this. Because if a bunch of people get in a room and try to engineer some of those returns, the traditional way to get there is to sell to someone else based on projected growth, etc. We are the someone else, as we learned last time around.

Jeremy Wright: Talks about the need for passion in the VC arena. People who build these Web 2.0 applications have passion for the application. The VCs have a passion too, but it’s usually a passion for making money- that’s precisely why they get hired. I agree with Jeremy that you should strive for a passion for both, but too often the two passions can conflict with one another. Much like a musician who is passionate about her music dealing with a record label whose job it is to commercialize and monetize that music.

Phil Sim: Talks about the launch of his start-up, without traditional VC money. More importantly, he talks about the need for a good business plan. I love this quote:

My original business plan didn’t suddenly start to suck because the bubble had popped. I think about what we might have done differently with MediaConnect had we had venture capital and realistically, I think we’d have been far less worried about ensuring everything we did was monetised and our business model was profitable and I’m not convinced we’d have come out the other side. Bootstrapping is a wonderful way to ensure you’re focused on what should really be the core concern of most every business – getting profitable.

Fred Wilson: Recommends this approach:

Be the entrepreneur’s partner. Help him or her. Be there for them. Support them. Counsel them. Share the risk with them. Have fun with them. Laugh and cry with them. And make boatloads of money with them. It’s a time tested formula and it will work forever.

The most important word in that quote is “forever.” It can’t be a slash and burn (the retail stock buyer). There has to be first a real, sustainable product. Then a real, sustainable profit that can be grown over time. Do that, and I’ll buy your stock all day long.

Obviously, there are other ways to make money without going public. I talked a little about that yesterday. But as someone who made a ton of money and then lost a ton of money during the last tech boom, bubble and bust, and as someone who created and developed a product that got into the VC pipeline the last go around, I think we have to proceed thoughtfully and with caution this time around.

The cliff is out there somewhere. Just beyond our view perhaps, but it’s there. If we hold hands, maybe we can help each other from wandering too close.