Lumia

The startup world is highly hit-driven. For every success, there are over 30-40 failed startups. Even the top venture funds lose money on close to 75% of investments. And probably make meaningful returns on less than 10% of their investments. All that is about to change in the next few years … tech will be even more hit-driven than in the past.

Lots of smart (and not-so-smart) undergrads are dropping out of college to pursue startups like never before. Several of my students have dropped out just in the past 12 months. More engineers from top Engg schools are becoming entrepreneurs than ever before. Also the MBAs. While the typical (if there is one) Wharton MBA used to be a banker/consultant 5 years back, there is a marked shift towards tech & entrepreneurship. In short, there are lots of aspiring entrepreneurs. Further every other guy, self included, is an angel investor (the remaining folks, of course, are the said entrepreneurs). The supply of angels will only increase after the FB millionaires enter the fray. In short, there is a lot of money chasing these entrepreneurs. What does all this mean? IMO, too many startups will get funded and too many will fail.

Lots of poor ideas will get funded. Lots of ideas will get funded too early. Lots of ideas will get funded at crazy valuations. It takes little to get funded these days. Don’t get me wrong. I am a big believer in the long-term prospects for tech, especially web/cloud (heck, I started a PhD focused on e-commerce in 1999 and did my first startup in 2000 … I’ve been a believer for a while now). And I continue to believe that the best innovations on the web are yet to come. So I do think there will some big hits in the future, perhaps bigger than in the past. That said, the supply of entrepreneurs and capital exceeds potential opportunities. So there will lots of failures. In short, the successes will be bigger than in the past and there will be more failures than in the past. As a result, the tech space will be more hit-driven than ever before.

What makes things worse is the quality of the median talent will only continue to decrease with the entry of so many folks into the tech world. Almost everyone is a hacker or “code ninja” these days. In the 90s, most of the engineers had degrees in CS and understood how databases & OSes work. Many of today’s code Ninjas are history or social science majors who sensed a better opportunity elsewhere. Solid understanding of fundamentals is not needed anymore coz there are enough companies looking to hire and enough capital chasing the talent. Here again, the best developers are way better than the last vintage and they will become even more valuable given the median developer out there.

So what’s the takeaway:

1. Consumers will be better off: So many ideas & opportunities will be pursued. This will bring more products & services to consumers.
2. Investors will be worse off: Median angel & venture returns will drop (it’s already fallen relative to the 90s).
3. Winners will be bigger than ever before: Good ideas will be off the ground faster (access to capital) and at lower cost (cloud). They will also scale faster (web-based businesses scale faster than traditional businesses). Small differences in quality will result in big differences in success because of this ability to scale. So winners will completely dominate their markets. So expect some big exits like FB. Expect some superstar developers. And expect some venture funds to win big while most venture funds, startups and tech talent will produce low returns.

I am rethinking my role as an angel.