One quick note related to the discussion of life-style versus high-growth businesses. Today’s venture capital environment plus the infrastructure available to start-up companies will start to create a “barbell” problem/situation for start-ups.
Historically (before October of 2008), companies with solid business plans and good teams were funded largely based on amorphous subjective capital requirements for operations and scaling the business over a well-defined period of time with well-defined goals within that period (break-even, financeable milestones). Start-ups, not wanting to re-enter the funding cycle again too soon, would gun for as large a round as possible while balancing valuation / dilution concerns. VCs, having raised large funds with a limited number of partners + hours in the day to put those funds to work (among other supply chain issues), would generally prefer larger deals that enabled the firm to capture a larger percentage of ownership. I believe this “traditional” model is already changing.
Right now in early stage venture firms and start-ups, I believe there is a huge amount of “sorting” going on. The sorting categorizes all start-ups into two big buckets – or ends of a barbell – one that has light capital requirements (software, web applications, SaaS apps) and one that has larger capital requirements (hardware, semiconductors). There is no opportunity for start-ups in the middle right now because the barbell defines the acceptable outcome and ANY outcome is rare right now. Non-capital intensive companies need to be run lean and mean until they have achieved some scale; capital intensive companies have little choice when it comes to starting and scaling: they use other people’s money and therefore have larger outcome requirements; they must be certain to hit financeable milestones with current funding.
This market environment will be very challenging for companies that SHOULD be in one end of the barbell but have ended up in the other. For example, start-ups that have raised too much capital relative to the state of their business and market will be challenged in this environment. Capital intensive start-ups that have yet to hit demonstrable scale or financeable milestones and need to raise more money will be challenged in this environment. The barbell problem is going to create a much more pragmatic environment with respect to which companies need which type of funding.