Venture capitalists: Everyman as entrepreneur

By:
Helen Avery
Published on:

Some six million businesses were created in the US in 2012. The country is experiencing a start-up boom. What impact is the wave of entrepreneurs having, and how are the angel investor and venture capital industry adapting?

The word ‘entrepreneur’ used to enjoy a certain cachet. The impresario was predominantly male, charismatic for sure, with a devil-may-care attitude. To be entitled to the label you probably worked 20-hour days for a few years, travelled extensively, made and lost a few million dollars, dated an heiress to a corporate empire and at some point owned a failing sports team or airline. But you fundamentally changed the industry in which you were operating, be it fashion, transport, technology, retail, art or entertainment, and that entitled you (after you had made your first billion dollars) to write a book outlining the keys to your success.

These days in the US, however, it seems everyone is an entrepreneur. Since the financial crisis, the number of businesses being started has rocketed. In 2012, 514,000 businesses a month were created, according to the annual index of entrepreneurial activity from the Kauffman Foundation.

"If everyone used to walk around with a script under their arm, now it’s a business plan," says the head of a New York City incubator. ‘Entrepreneur’, ‘ innovation’ and derivatives thereof have saturated the global vocabulary. According to Amazon.com, 642 books pertaining to ‘innovation’ have been published since February alone. Entrepreneurship is the most popular focus among university students when selecting courses – more than 2,000 courses in the US reportedly have an entrepreneurship bent.

It would be easy to regard the current hype around entrepreneurship and start-ups with scepticism. The younger wave of entrepreneurs has little or no recollection of the dotcom boom and bust. Back then there was a similar gusto. Everyone with an idea set up a domain name; many were certain that was enough to become an internet millionaire. There are elements of the ridiculous this time around too. Are you thinking about building an app? You’re an entrepreneur. Renting out your second bedroom on Airbnb.com? Congratulations! You’re an entrepreneur.

But this cycle is also different. Technology is driving start-ups and aiding their innovation, but the industries the start-ups are in reach far beyond pure tech. And the new businesses are not only disrupting the markets in which they are playing, they are also disrupting the venture capital and angel industry. The world of start-up finance is having to evolve.

Jeff Fagnan, a partner in venture capital firm Atlas Venture
Jeff Fagnan, a partner in venture capital firm Atlas Venture
"It’s always been ‘cool’ to be an entrepreneur; now, however, it is accessible," says Jeff Fagnan, a partner in venture capital firm Atlas Venture. One difference between the current burst in start-ups and those in the dotcom boom is that it is far more capital-efficient to start a company today than it was 10 years ago. "With open-source software, the cloud and on-demand, it is five to 10 times cheaper to get a product to market now," says Fagnan. Companies can build hundreds of customers or thousands of unique site visitors or users in a very short time thanks to the internet and the ease of connecting with targeted interest groups. Social media have also made it possible for interesting ideas to garner broader public attention.

"It used to cost $2 million in infrastructure to set up a firm. Now you can get off the ground with just a few hundred dollars," says Akhil Nigam, co-founder and president of Boston-based accelerator MassChallenge.

That’s a little misleading. But if at least one of your co-founders is a techie who can work for free initially, you can certainly set up enough of a company to see if your ideas/products are worth pursuing further.

If it’s so easy to run with a new business idea, why wouldn’t you? Nigam says: "There aren’t a lot of employment opportunities for young people and graduates. There is very little hiring going on in the government sector worldwide given that governments are close to bankruptcy. Corporations are also not employing at rates that they once were. Add to this that people hear more about their peers attempting to start their own apps, come up with new ideas, start new projects, and the result is an increase in the amount of young people launching new companies."

It is not just graduates. Waves of layoffs during the financial crisis left many unemployed with little option other than to take the plunge and start their own businesses. In 2009 and 2010 more businesses were created in the US than in any year before, except perhaps immediately after the Second World War. The figures for 2012 are still far higher than pre-crisis figures.

Ask angel and seed investors and they will also tell you that there seem to be more new business ideas than ever before. It’s impossible to quantify. It could be that individuals are simply more vociferous about their ideas today and that ease of communication means ideas are shared more widely now. But it is certainly arguable that the economic collapse forced people to come up with new ideas to make money, or to come up with ways to improve efficiency. Technology has also opened up new industries – such as the applications industry – allowing for hundreds of thousands of new ideas to emerge.