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At the top of the year, I made a few New Year’s Predictions on changes in the startup scene. Let’s see how I did:
The contraction of venture capital. VC assets under management exploded in the late 90s on the basis of a bubble, and while returns plummetted post-bubble, the assets did not. We will see venture capitalists return their focus to capital-intensive industries, which describes software less well than it used to. But to the extent that there are very attractive economics in software, and a load of moneymen who understand the business, we will see smaller funds, perhaps with different structures than current VCs, that are able to handle these busineses.
We are definitely seeing this in the papers. The Web 2.0 thing is popular among those who focus on software, but as I look around the technology papers, particularly in Boston, the focus is on biotech and materials (or as I say, germs and goo). The pages of Mass High Tech now have a few software stories (including one featuring yours truly), but mostly its the bio and nano guys getting the ink. So a lot of early-stage risk capital is going wleswhere, and we are seeing the moneymen focusing on later stages in software, per this post by Fred Wilson, or hopping into alternative structures, per my next prediction.
The expansion of “alternative” financing. In addition to smaller funds, we will see different models for financing early-stage startups increase in popularity, including debt and royalty structures.
Charles River Ventures Quickstart convertible debt program is interesting in this regard. And Paul Graham’s Y Combinator, a micro-fund that works more on a grant/stipend model for founders, with an equity-back end, is also getting a lot of press. And the aforementioned Fred Wilson post talks about the many alternatives available at the early stage now.
The decline of advertising. The success of Google’s contextual advertising has confused someinto thinking this is a cure-all for funding software projects, and is particularly popular with the “everything should be / will be free” crowd. We will see new revenue models for software - particularly for web-based “services” - that allow for revenue generation with fewer customers.
I’m not sure I called this one right, or at least my timing is too aggressive. Yahoo, AOL, EBay, and MSFT are all doing the contextual advertising thing, which is creating better competition and therefore more efficient economics for startups that want to be media companies supported by advertising. And Paul Graham is now well-known for his support of advertising as a business model. But I am not alone in speaking out for alternative revenue models, like (gasp) direct subscriptions/licenses, per-order referrals (as opposed to the per-inquiry implied by CPC pricing). Certainly no major cure-all has emerged, though I am hopeful with the recent burst in innovation by the likes of Amazon and eBay. I certainly think that those who get out of the CPC/contextual “drag and drop” model of advertising management will have far higher success, but for the purpose of this accountability, I have not yet seen that in a high-profile exit. Even the story of the year, YouTube’s $1.6B aquisition, was on the assumption that Google would be able to monetize the asset with advertising.
Should I try to predict for 2007? Why not! But it can wait until after the holiday.
Merry Christmas to all!