The Real Choices Facing Startups: Talking with Michael Moritz On Stage November 30 in San Francisco

11/17/10Follow @wroush

Time for a reality check. Is it really easier to start a tech company these days? That’s certainly the conventional wisdom in Silicon Valley—but Michael Moritz begs to differ. I’ll be chatting with the legendary Sequoia Capital partner at San Francisco’s Kicklabs on November 30 (register here), and the top item on the agenda will be to look at the choices available to today’s startup entrepreneurs. Specifically, Moritz questions whether the profusion of incubators, angels, super angels, seed funds, and other options for early-stage funding actually boosts a startup’s chances at long-term success. (Read on for a taste of Moritz’s thoughts on this in his own words.)

The idea that founding a startup—or at least a Web or mobile apps startup—has become much simpler is based on two perceived trends. One is the emergence of cloud services and open-source software components that save companies money on infrastructure and development. The other is the growing ease of raising $200,000 to $1 million in seed funding by passing the hat to individual investors and micro-VCs. No longer is it necessary, so this meme goes, for early-stage entrepreneurs to tote their PowerPoint decks to dozens of Sand Hill Road venture firms, then wait months for the green light and the term sheet. Today entrepreneurs can take charge of their own fundraising rounds, or so investors like Y Combinator’s Paul Graham argue.

To Moritz’s mind, the idea that individual investors can take the place of venture firms is a sign of short-term, or at least limited, thinking. The problem—which he expanded on in an e-mail conversation with me early this week (see below)—is that raising seed funding is only the first of a hundred big challenges in front of most startup entrepreneurs, and that individual investors may not be equipped to help with problems 2 through 100.

To Moritz, who has been with Sequoia since 1986, the “rise of the angels/death of VC” meme isn’t even particularly new. All of this has happened before, he argues, in the form of Idealabs, CMGI, and the other Internet incubators that were all the rage during the dot-com boom years—and look how far they got.

We’ll be talking about all this and more on November 30. Think Moritz is wrong? Register now and put your own questions to him at the event.

Now to Moritz’s actual e-mail, which is fascinating. My specific question to Moritz was, first, what do founders of early-stage startups need to know about the changing landscape of funding options? For example, what are the advantages and disadvantages of choosing to launch a company by participating in incubator programs like Y Combinator, TechStars, AngelPad, or KickLabs; by gathering seed funding entirely from syndicates of individual investors; or by approaching traditional venture firms?

Here were his thoughts:

“It’s easy to conclude that entrepreneurs have more choices today when you look at the incubators, accelerators, co-work spaces, angels, super angels, micro VCs, seed funds, and venture firms that say they are interested in small companies. But, when you boil all this down, there are only three choices—individual investors, mini VCs and VCs. When you look closely, the only place where entrepreneurs have greater choice today is for a limited amount of initial capital—and limited amounts of capital are just a commodity.

“For all the other choices facing founders the menu is shorter than it was a decade ago. There are fewer places today for an entrepreneur to get founder services such as closing their critical first half-dozen engineers; attracting product managers; visiting and winning their first customer; getting started in Europe, Japan, South America, China, India etc; coping with intellectual property squabbles; composing offer letters; figuring out compensation schemes; getting quick executive level responses from the world’s largest five hundred customers; getting help on scaling infrastructure (networks, outsourced manufacturing, preferential tariffs with carriers, etc.); being instantly plugged into a huge skein of fellow founders and CEOs; raising subsequent rounds of capital; obtaining quick bank financing; getting equipment leasing; dealing with brutal M&A negotiations—I could go on an on. Suffice it to say that no ‘individual syndicate’ (most of which are riven with infighting and dissent) does this.

“Don’t forget too that it’s only mobile/Web apps companies that have a prayer of getting a product out with a small amount of money. But, that’s just the opening gambit. They have to make hundreds of subsequent moves for which they will need something other than a few hundred thousand dollars. Then, there’s a whole cadre of sectors—energy, financial, healthcare, semiconductors, enterprise/carrier infrastructure, SaaS—that people like us are interested in but few individuals touch.”

I also observed in my initial note to Moritz that at least when it comes to raising small amounts of initial capital, the options available to founders do seem to be expanding. So I asked him what Sequoia doing differently these days, if anything, to court early-stage startups and ensure that the firm has access to the most promising founding teams. His answer:

“We have always said that there is nothing we like doing more than getting into to business with first time founders where we can deliver a suite of services, including their very first round of capital. We are doing more of this today than we have ever done and since 2001, 38 founders—including Chad Hurley of youtube and Omar Hamoui of AdMob—have used Sequoia Capital’s offices as their headquarters for the critical first few quarters of their companies.

“Remember that once upon a time in a dark and distant land there were groups with names like CMGI, @ventures, ICG and Idealab that were loudly telling everyone that they would put us out of business.”

It’s provocative stuff that more than a few individual investors even startup founders might disagree with. We hope you’ll join us on November 30 at San Francisco’s Kicklabs for a full conversation with Moritz on this and other topics affecting today’s technology entrepreneurs and investors.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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