I read this article by Joel Spoolsky about the first dot-com bust and it help crystallized a series of thoughts about the role of venture capital in the development of technology and software, particularly of Internet technologies. Give it a shot. Also, I think Cory Doctorow's "Other People's Money," is a helpful contributor to this train of thought.
The question I find myself asking myself is: to what extent is the current development of technology--particularly networked technology--shaped by the demands of the venture capital market? And of course, what kind of alternative business models exist for new technologies?
I guess I should back up and list the problems I have with the VC model. And by VC model I mean private investment firms that invest large sums of money in "start up" companies. Those issues are:
- Breaking even, even in--say--five years, is exceptionally difficult from a numbers perspective, let alone turning a profit of any note. This is largely because VC funding provides huge sums of money (it is after all really hard to give away 20 billion a year in 60-120k a year tops.) and so seed sums are larger than they need to be, and this has a cascade effect on the way the business and technology develops, particularly in unsustainable ways.
- VC-funded start-ups favor proprietary software/technologies, because the payoff is bigger up front, which is often the case. It's hard to make the argument that you need seed money for a larger, more slow moving product... Small and quick seem to work better.
- The VC-cycle of boom and bust (which is sort of part and parcel with plain-old-capitalism) means that technology development booms and busts: so that a lot of projects tank when the market crashes, and that the projects that get funded during the booms are (probably mostly) not selected for their technological merit.
- VC firms tend to be very responsive to fads and similar trends in the market. (e.g. dot-com bubble, web 2.0, Linux in the mid nineties, biotech stuff, etc.) which means that VC firms generate a great deal of artificial competition in these markets, which disperses efforts needlessly, without (as near as I can tell) improving the quality of software developed (eg. in the microblogging space, for example, the "first one out of the gate," twitter, "won" without apparent regard for quality or feature set.)
Venture capital funding provides outfits and enterprising individuals with the resources for "capital outlay" and initial research-and-development costs, and in doing so fills an economic niche that is otherwise non-existent, and this is a good thing indeed. At the same time I can't help but wonder if the goals an interests of venture capitalists aren't--in some ways--directly at odds with the technology that they aim to develop.
I also continue to question the ongoing role of this kind of "funding structure" (for lack of a better term). I think it's pretty clear that the effect of continuing technological development is the fact that the required "capital outlay" of any given start up is falling like a rock as advanced technology is available at commodity-prices (eg. VPSs, Lulu.com), as open source software tightens development cycles (eg. Ruby on Rails, JQuery). Both of these trends, in combination with the long-standing problems with VC funding, means that I think it's high time we ask some fairly serious questions about the development of this technology. I'll end with the question at the forefront of my thinking on the subject:
Where does (and can) innovation and development happen outside of the context of venture-capital funded start ups in the technology world?