The real bubble

Great business plan tweet

While there’s been plenty of discussion and debate about whether we’re in some kind of valuation/venture bubble right now for early stage tech, there is one bubble that I’m pretty sure of. I’m seeing more great business ideas right now than I can remember seeing at any time in my 10 year venture career.

We typically see around 1,500 business plans a year at Foundry (we actually see more than that, but this is the approximate number that are relevant to our investment focus). On average we’ll take a meeting with somewhere around 10-15% of these and hear a bit more than what was in the introductory email or initial business plan. And we typically invest in 8 (our Foundry blog does a pretty good job of tracing our investment history and pace if you flip through our old posts). These numbers work for us and for our strategy and part of our operating philosopy is not to deviate significantly from our investment pace (depending on the mix of seed investments this number could go up or down in any given year but overall we’re comfortable at roughly the 6-10 new investments per year pace).

But something isn’t right with the early stage world right now. I’ve said a few times in the last 24 months what a great time it is to start a company and clearly more and more people are believing that because we’re seeing a significant uptick in the number of investment opportunities we see here at Foundry (I’m sure we’ll be well above 2,000 for the year). More importantly, we’re seeing many many really good, interesting ideas. I’m blown away by it. And it’s frustrating, because I can only spend time on so many things and we’re still only going to make 6-10 new investments in any given year. But never before have I had to say “no” to so many businesses that 1) I thought were super interesting; 2) were clearly going to get funded by someone; and 3) in another time/market I’d love to spend more time with.

To be clear, I don’t see anything to suggest that traditional venture math won’t continue to hold true (a good performing venture fund will still see about 1/3 of their investments fail, another 1/3 do only “ok” and 1/3 do better than that – with maybe 5-10% becoming real stars). And, of course, I recognize that part of our job on this side of the table (at least in venture funds with our investment strategy and not one of making 20 or 30 investments a year to spread around) is to make the hard choice of which of a number of great companies really has the chance to be outstanding.

But wow – is it a fun time to be in venture! And perhaps even more so, a fun time to be an entrepreneur…

  • Seth, I’m interested to know what you mean by “But something isnu2019t right with the early stage world right now” in the third paragraph. I can think of numerous things myself (generally far outweighed by positive things I’m seeing), but don’t see in this post mention of anything that “isn’t right.”

    • poor wording choice, i think jim. i was more trying to be dramatic than makerna statement that something was truly wrong…

      • Gotcha. Linkbait works better in the title! ๐Ÿ™‚ nnFWIW I concur completely. The thing that’s “wrong” is having to say no to so many promising entrepreneurs and opportunities. High class problem. I really like that a fair number of folks who don’t get the VC funding they seek will succeed anyway! #bootstrapFTW

        • i’m all for bootstrapping! don’t take vc! (as i’ve written here before)

  • Seth, good post. Maybe the title is a bit misleading. I understand Foundry policy and I think it will work well on the long run. There should be just more Foundry copycat to satisfy demand ๐Ÿ˜‰ Do you think that your “format” could be exported?

    • the title was meant to either be 1) provocative or 2) link bait! (a littlernpromotion is never bad…).

  • Mike

    I think Dave McClure might have a few things to say about your post.

    • I suppose that’s true. How do you think he’d respond (or should we just askrnhim)?

  • Been reading your blog for some time. Just a quick note to say keep up the great work. I really enjoy your writing.

    • appreciate the note – thanks for reading (and writing in!).

  • Sol

    doncha think this has more to do with the current unemployment situation than anything else? A percentage of today’s “entrepreneurs” are doing this because they don’t have too many other options beyond Target or Walmart. As the unemployment numbers begin to dip, I think we’ll see who sticks with it.

    • i don’t think it has much at all to do with that. the entrepreneurs i wasrnreferring to in my post hadn’t been laid off from walmart…

  • Hey Seth, it’s nice to know that the “let us know how it goes” entrepreneurs often get from VCs aren’t always easily rolled off the tongue ;^)nnI met with Eric Feng last month at Kleiner Perkins to discuss the fragmentation of the Web, KPCB’s heavy investment in Klout and the prospects of HowTru’s credibility vs influence approach. He mentioned KPCB’s interest in getting involved earlier in new ventures to avoid the inflated price tag that came with the likes of Twitter…I wonder if a more aggressive bootstrap investment approach is prudent in times of innovation peaks like the one I believe we’re in now. Perhaps this only applies in the tech sector where the cost of developing a prototype and testing the market is relatively low.

    • I’m a fan of bootstrapping, although with some of the valuations earlyrncompanies are getting I can understand why more and more entrepreneurs arernturning to venture financing. I also would be worried that we’re back to arntime where a half dozen or more companies are being started going afterrngenerally the same thing (which also pushes entrepreneurs to be more likelyrnto take on venture). If I were starting a company I’d still be of the mindrnthat the best financing is to get a product up and running and get a fewrnpeople to pay you for it. better to have the option to take venture moneyrnlater (if at all)… what do you think?

      • Customer funded is always the “best” option, but it’s not a luxury often enjoyed in the tech sector (amazingly with so many early adoptive types in the space) as people expect to contribute/participate in the alpha and/or beta periods of a technology free of charge. I suppose that the shotgun approach of say, Sequoia, vs the selective + put the whole power of our agency behind our choice approach of a KPCB (similar to Foundry’s no?) yield different results during different market behaviors. Is it possible for a VC firm to dynamically move from one model to another to capitalize on market’s peaks and valleys?

        • i’d be leery of taking money from someone with a shotgun approach. they’rernnot as likely to be supportive of the business and you end up with strangernsignaling problems when someone like that doesn’t want to reup. we view seedrninvesting as we do series a investing – we’re making a real commitment to arncompany – and treat the investment decision as such. my partner brad wrote arnnice post about this a while back.

          • Ironic, I was just e-mailing Brad. I’ll look for the article (unless you have the link handy?).nnThanks for the back-n-forth Seth.

          • too funny… here’s the article:rnhttp://www.feld.com/wp/archives/2010/08/how-i-think-about-seed-investing-as-a-vc.html

  • If there are any problems on the horizon in the startup community it will be more on the side of early-stage venture capital. I think because of technology advancements and a rise in popularity of startups there are many more good companies. When these companies get investments or become players in the market the piece of pie keeps getting smaller. Industries may be split into dozens of businesses who are valued at $1-5 million instead of 2-5 major market players who have $30-100 million valuations. If there are too many good companies taking small chunks it doesn’t bode well for the returns needed by most VC’s.