Jerry Neumann (ganeumann): Contrarian thought: startups being less expensive to launch was just a phase

I replied with:

I guess I’m the same kind of contrarian.

The bifurcation of inexpensive “digital small business” vs venture startups.

Jerry’s tweet was in response to this paper:

the Lerner, Nanda paper/op-ed I mentioned yesterday is partly based on startups being permanently cheaper to start. I think this is a bad assumption

Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn

Abstract: Venture capital is associated with some of the most high-growth and influential firms in the world. Academics and practitioners have effectively articulated the strengths of the venture model. At the same time, venture capital financing also has real limitations in its ability to advance substantial technological change. Three issues are particularly concerning to us: 1) the very narrow band of technological innovations that fit the requirements of institutional venture capital investors; 2) the relatively small number of venture capital investors who hold, and shape the direction of, a substantial fraction of capital that is deployed into financing radical technological change; and 3) the relaxation in recent years of the intense emphasis on corporate governance by venture capital firms. While our ability to assess the social welfare impact of venture capital remains nascent, we hope that this article will stimulate discussion of and research into these questions.

SSRN-id3633054.pdf (342.6 KB)

Lots of good discussion in the replies from Jerry’s original tweet. Via Jonathan Libov @libovness, also lead me to this article:

Shopify and the Hard Thing About Easy Things

This is going to be a very long quote:

Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.

By making Direct-to-Consumer (“DTC”) easier, software like Shopify increases entropy and lowers the probability that any specific company will generate sustained profits.

Tobi borrowed the phrase “arming the rebels” from a geopolitical strategy in which a big, powerful country, safely separated by miles and oceans, supports rebel forces fighting for change in a smaller, poorer, less powerful country by giving them money, arms, and implied support.

Think the US backing the Contras against the Sandinista Government in Nicaragua or the Soviet and Cuban support for anti-apartheid forces in South Africa. If you want to put on your tin foil hat, think the US funding Osama bin Laden and the Afghan Arab fighters in the Soviet-Afghan War.

Shopify is an amazing company full of great people, but Shopify isn’t really arming the rebels .

When every rebel is armed, none really is. It’s like when you played GoldenEye 007 as a kid. Getting the Golden Gun the hard way was dope. Everyone getting the Golden Gun with a cheat code made the game suck.

When everyone has the same plug-and-play tools, the profit flows away from the rebels, and towards the arms dealers, forcing rebels to devise new guerilla tactics to take back profits.

Having just recently really leaned into setting up a Shopify store, and using lots of them that got set up by SMBs during this current pandemic, this resonates.

More: having been involved in accelerators very early, the insight was that a small group of people understood that building / deploying / distributing software was in the midst of getting dramatically cheaper to get started. Or at least, cheaper with more functionality built – that still doesn’t mean you have a viable business, and distribution / marketing is a process, not something you ever complete.

The information asymmetry was about how to find, fund, and operate.

Both on the investor side – first Seed VCs with cheque size < $1M somewhere in 2003 - 2005, with O’Reilly Alpha Tech Ventures being “the first”. OATV is now IndieVC, BTW – once again being “early” on innovating models.

And on the founder side – how does venture work? how does incorporation work? how does accounting work? is this even possible? how do I growth hack today? How do I model CAC? What’s a budget and use of proceeds? Plus a whole tool kit around using and building digital-first tech and tools.

Building a full stack web app in Rails vs. one in Enterprise Java as just one tiny example.

The founder asymmetry was solvable with “advice” from the accelerator program. Until it diffused out more, where many accelerator programs lost their value / edge (at least, on the info side). This is why most of the incubator programs[1] in Canada are not very good.

My goal with VS here is to continue to reduce the info asymmetry. In part, this means helping founders think like investors. Both in thinking about their own business ventures, but also in investing and supporting other founders. So we can build the next generation of angel investors, and keep iterating on models.

[1] Incubator – some sort of program / advice, usually office space, sometimes take equity, no cash investment dollars (“in kind” is mostly BS).

Contrasting to Accelerator – cash investment for equity. I need to go through David Crow’s list, but there are very few of these in Canada. Maybe none west of Toronto?

The two have different business models (and thus, different incentives).

Most Canadian incubators get grants and their incentives are to show some sort of metrics that the government likes, in order to get more grants, in order to get paid salary. This leads to lots of non-venture-outcomes.