Unique Technology Still Matters to Start-ups

A short time ago I had breakfast with my friend Abigail Johnson. Abigail has worked with numerous August Capital portfolio companies. She is a great strategic thinker who brings to the job of public relations a broad market view that can be invaluable. At breakfast she was telling me about the results of a survey she had performed concerning the importance of pure technology in startups today. The discussion struck me as something that would be of interest to VentureBlog readers, so I asked her to share her thoughts on the survey. Here is what she had to say:

Early last fall, I started wondering if unique technology is still an important asset for start-up companies. From my perch as a long-time strategic communications and public relations advisor to VC-funded start-up companies, I had been seeing some uneasy signs in recent years that the winds had shifted.

First, my VC friends and contacts �" right here in the Silicon Valley �" have reported that many of their peers have largely become conspicuously gun shy, and had been for some time been expressing preferences for "incrementalism" rather than "innovation" in new deals. Second, the characteristics of our own "deal flow" had changed dramatically.

Since the late ��80s, literally hundreds of high-energy, technology-focused entrepreneurial teams have been sent our way by their VCs, in search of a defensible position of leadership. In their pitches to us, it's always been the technology that drove their passions and was often the source of the company's most defensible and substantial differentiation and competitive edge. But lately, "it's the consumer, stupid" has taken over. The technology �" when it exists �" seems to be like Dirty Uncle Saul �" something you don't talk about in public, and certainly not as your raison d'être as a start-up.

Finally, there was my perception �" and in my business, perceptions (even if wrong) are important �" that the companies getting the best valuations were of late "consumer facing". Chris Shipley in her keynote at DemoFall cited her firm's research that IT departments are increasingly being forced to accommodate their infrastructures to technical decisions already made by individuals acting in their own interests. I took this to be further reinforcement that a company's story �" the one that had to resonate with the VCs and ultimately the press and influencers �" had to rest on low risk and mass appeal, and that these new biases, in turn drove the businesses (and business plans) that were getting funded, and that ultimately made it to our doorstep.

Was it possible that here, in the Silicon Valley, technology didn't matter any more for start-ups? Was the era of unique technology as "the" crucial asset for start-up success now over? We decided to find out.

We contacted about 75 key venture capitalists, entrepreneurs, press and analysts and asked them �" with a short survey �" what they thought. We got an extremely high response rate; it turned out that almost everybody was interested in the topic, and in sharing their opinion. A number of people commented that the question was provocative to them because no one else seemed to be asking it.

And, as it turned out, nearly everyone was still interested �" very much so �" in technology as a crucial asset to start-ups. You can look at the data yourself �" a summary report can be found here. But let me give you the bottom line: 91% of the respondents believed that unique technology is "usually" to "always" crucial to the success of start-ups. We asked a half-dozen additional questions, trying to ferret out why they thought it was important (for competitive positioning, for higher valuations, etc. etc.) and the report will also tell you that. But that 91% was a surprise, given the vibes I was feeling, and to me, the results were quite pleasing.

I was pleased because we have always felt that unique, cutting-edge technology is a defining characteristic of those companies that truly and dramatically improve our lives in some way, and that such companies usually have the makings of the best, most successful, and most interesting start-ups. Certainly other factors matter �" a lot. But technology is at the heart of a start-up company's leadership. I was also pleased to see �" and to be able in turn to share with entrepreneurs and those that make up their ecosystem �" that creating new ideas and unique approaches �" often from the ground up �" continues to matter �" very much.

A few other things fell out of our survey, including one interesting and noteworthy dichotomy. But that's a story for another post.

Comments

[Darren]

David,

Thanks for the post. I would concur that from my perspective, technology is a key component of most deals done by VC's. The consumer mindset is also true as technology for technology's sake is not very profitable in the long run. I think that most VC's are being a lot more realistic than they were during the bubble and that's why it might seem that they are being conservative, but I think it is just a correction to being driven by the market.

Darren

[doerrleftmepoor]

This study reminded me of Bob Seger's song Old Time Rock Roll. The one that goes:

"...I reminisce about the days of old, with that old time rock 'n' roll."

And that's just what this study found, people reminiscing and wishing they were
back in the Old Days when tech mattered.

But we're living in 2006. And these days, they're playing a lot less Rock and Roll and a lot more Hip-Hop.

And one more thing, the VCs have a lot more money. And that's why tech matters less.

Here's why: In the last 30 years or so, some investors in VC funds have made a lot of money. I mean a LOT of money -- imagine having had money in the KP fund that held Google! This has caused an avalanche of money to flow into VC funds.

VC's make money in two ways: carry and management fees. Carry is the money VCs earn when the fund makes a profitable investment. Management fees are fees collected yearly and are charged to investors whether the fund makes money or not. The fee is generally 1-2% per year. In the old days, when funds were $100 Million or so, the management fee didn't amount to much. But as the money going in to VC funds has swelled, the management fees have become very significant. 2% on a $1 Billion fund is $20 Million per year! It's clearly in VCs interests to raise big funds.

But here's the problem - investing large amounts of money in new technology development is impossible. The most interesting technologies are still developed by small teams of really smart people toiling away for several years. Adding money to these kinds of efforts doesn't increase the odds of success. Nor does it make the technology come any faster. Tech development is the same as it ever was - hard, slow, and uncertain.

So what's a VC to do? The answer seems to be to spend money to push technologies that are only so-so. And spend they do. It's easy to spend lots of money to push a product - especially an undifferentiated also-ran. There's advertising to be done, distribution deals to be closed, partnerships to be shipped, sales people to be hired, etc.

And in today's world, if you make enough noise in the market, your inferior tech can win. And that's a winning strategy for VCs who want to "invest" like crazy so they can run out and raise more money...and collect fat management fees year-in and year-out.