Sarah Lacy of BusinessWeek online published an interesting article about the state of the venture capital (VC) industry. According to the article, despite the increased valuations and deals, expect to see even fewer VC firms next year. In short, despite all the recent interest in tech stocks, the volume of IPOs is extremely low. Hence, fewer exits. Moreover, the YouTube type homeruns that sustained the 80/10 benchmark set in the late 90s is increasingly the exception for VC firms. http://www.msnbc.msn.com/id/21114509/
From my perspective, the issue has less to do with the supply side of IPOs or VC firms. The fundamental issue is the lack of strategy in most of these portfolio companies. One of the overarching problems is the status quo. What does that mean? The majority of these start-ups could not show you or articulate a truly differentiating approach, business model, or marketing strategy. The prevailing approach is to build it first and figure out the rest along the way. A number of venture backed start-ups in the Web 2.0 and other areas of technology services are too busy developing their products / solutions autonomously with no clear business or marketing strategy. Otherwise, know as autonomous innovation. I see only a handful of initiatives leveraging the open innovation framework or reflecting the new social media way of marketing.
Earlier this year I outlined a simple framework for picking truly innovative start-ups in my blog. Not one of my criterions had to do with leapfrogging intellectual property or technology. I think the days of being the first to invent a router or some other infrastructure plumbing are over. And good luck trying to go IPO with a strategy of building a cheaper mousetrap. Most of the notable 10X homeruns have to do with disintermediation, disruption, and democratization of relatively well-established things. The simplest guideline for a successful exit has more to do with understanding the need / problem and developing a solution with consensus and feedback from your community. As Zimbra pointed out to me in several conversation earlier this year, if you cannot validate your value proposition with your community from day one – good luck selling your solution when it comes time to launch your beta.