A huge number of web startups were funded over the last five years. Anyone who reads TechCrunch has seen them chronicled; the Web 2.0 menagarie was dizzying. And, like in the late ’90s before, the hopes (if not expectation) for each and every company were high. So why do I believe that we will see a big number of web businesses shuttered in 2009? Because the change in economic climate has made it more difficult for Venture Capitalists to suspend disbelief.
At each stage of investment, VCs need to suspend disbelief about some criteria or other. Initially it may be the ability to build a product with universal appeal. The next investor may see a product with universal appeal but need to suspend disbelief about the company’s ability to monetize that audience. The next investor may see a product with a big audience that is in the early stages of monetization but need to suspend disbelief about the ability to scale the scope of the business and the economics. Even expansion stage investors ultimately have to suspend disbelief that even with a working product and monetization that a company will be able to maintain growth and ultimately reach liquidity. So the investment lifecycle of a startup necessarily requires a fair amount of faith.
What happens in a down economy? Investors become less willing to suspend disbelief. Entrepreneurs need to make more progress between financing events before they are able to find investors willing to bet on their ultimate success. And while some startups will be able to manage that transition, others will not be able to reach this heightened bar. I suspect the end result will be a large number of web startups funded in the mid-2000’s will run out of money and, unable to find investors who are willing to suspend disbelief, will have to close their doors.
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