14
Oct

Is Venture Capital Pointing Entrepreneurs in a Socially Dangerous Direction?

“Bulk up really big and really fast” is a widely understood underlying objective of venture capital investing. VCs invest in lots of early stage businesses, but really they are after the handful (or even one or two) with the promise to magnetize enormous numbers of customers in the shortest possible time.

Wait, did I just say customers? Actually, in 2017, in VC parlance, customers has become synonymous with users. This equivalence (result of incorrect thinking) is the norm because most of the businesses capable of hitting the ultra difficult growth requirements of these VCs do businesses only online and, more often than not, in virtual/non physical products. So the method for the very few businesses capable of convincing VCs to invest, and to invest repeatedly, round after round, usually includes an important freemium phase of selling. Most people will buy something if it is free.

Selling? Sorry, I meant signing up. Signing up has become the preferred method of closing sales to these customers since a big section of these few businesses peddle subscription offers for something online: Streaming music, Office Productivity suites, etc.

Great for VCs. They plunk some money into a lot of early stage businesses (but don’t forget each of these is selected through a rigorous rejection process with maybe hundreds of other businesses left out). These businesses, in turn, hit their growth metrics and our world welcomes a few more very, very, wealthy people.

But what about all of us other folks left out in the cold? Since most of the products sold in this cycle are virtual, there is no need for natural materials to produce them, no need for delivery services to deliver them, no need for shelves to stock them. I could go on, but I’m sure you get the drift. With the exception of Alibaba/Amazon/Walmart-Jet/ the other really big hits — facebook, Twitter, Google, Office 365 (if you believe Microsoft’s claims) — are all about intellectual property, services and anything other than hard goods.

But, you may argue, what about Uber, Lyft and AirBnB? Their sharing services require cars and, in the case of AirBnB, homes. Sure, but the cars are already owned by drivers. Uber/Lyft/AirBnB are all simply booking and collection services. They aren’t adding to what Economists here in the US dreamed up a while ago as the Gross Domestic Product.

Facebook currently enjoys a market cap of in excess of $470 Bil. General Motors enjoys a market cap of $67 Bil (approx.). But I argue the network of manufacturers, producers, suppliers, delivery services, assembly services, and more circling GM does a million times better job of employing people across the entire social spectrum than Facebook, et al, will every do.

VCs plow money into the Facebooks of the world, while their colleagues on Wall Street diss GM, GE, and other “legacy busineses” and sell off their stocks, complaining about their paltry growth and growth potential. This phenomenon is definitely not positive one and must be closely monitored since it could prove lethal.

24
Jun

Does Public Micro Funding of Very Early Stage ISVs Help or Hinder Creation of Viable New Businesses?

Perhaps it is harsh to say, but some very early stage businesses are better off as concepts than actual funded efforts. For early stage Independent Software Vendors (ISVs) this is, too frequently, the case. Simply put, either no one on the management team has any prior experience with the kind of immense start up effort at hand, or the product concept, itself, has not been studied, sufficiently, to warrant capitalizing the notion and kicking off a business with it.

But with the availability of public “micro funding” resources, commonly referred to as “crowdfunding”, more of these notions and teams are actually embarking on a business effort, than one would otherwise hope to be the case.

Jenna Wortham published an article on the New York Times web site on June 14, 2014 titled Why That Phone Charger Took Two Years to Arrive. Ms. Wortham’s article, perhaps inadvertently, reports on some of the early stage gross errors capable of crippling an ISV business powered by a creative, but poorly assembled product notion.

The subject of the article is Ms. Wortham’s history of an investment she made, via KickStarter, a famous “crowdfunding” web site, in a business set up to sell a product called “JuiceTank”. As is typical of these investments, Ms. Wortham received no equity in return for her investment of $55.00. What she received was a confirmation of her order for something once called “JuiceTank”, which later became something called “the Prong”. As Ms. Wortham explains, this product promised to look like a “slim iPhone case”, but to serve as a “wall charger” for an iPhone.

So what’s the problem with all of this? the reader may ask. First and foremost, any investment in a start up with absolutely no product to show should be an equity investment, and not an order. After all, it took two years for this business to fill Ms. Wortham’s order. Further, Mr. Lloyd Gladstone, one of the founders of this “business”, as Ms. Wortham reports, “had no prior experience with products or manufacturing.” Mr. Gladstone’s lack of experience, when combined with the prior experience of his partner, Mr. Jesse Pliner, in Investment Banking, evidently resulted in acceptance in the KickStarter “crowdfunding” effort.

But who really benefits when an effort like “the Prong” nee “JuiceTank” secures the capital to get off the ground, but then leaves a lot of very small investors literally waiting years for delivery on a product purchased on no more than a whim. I would argue no one. In all likelihood Messrs. Gladstone and Pliner have felt no small amount of pain as they meander through a series of very dangerous errors. In turn, the group of very small investors waiting for their $55.00 purchase to show up on their door step, has also felt some pain.

Simply put: public micro funding, in this writer’s opinion, benefits no one other than the venue hosting the effort. Small investors are better off sitting on the sidelines while legitimate venture capital makes an effort to properly manage ISV notions all the way through to viable emerging businesses.

Ira Michael Blonder

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