The Future Of Startup Finance

Even though I love consuming as much startup related content as possible, I consistently make an effort to ensure that my media time is never purely startup focused.  On my iPad, I spend just as much time reading the Economist as I do the great startup blogs like A VC and How To Make It As A First Time Entrepreneur.  On my Kindle, I make sure to devote just as much time to reading Gary V’s “Thank You Economy” as to Orson Scott Card’s “Enders Game” (On which I have a great post percolating by the way).

I find incredible value in getting outside the Startup Bubble (No, not that Bubble) and exploring other works of both fiction and nonfiction.  My most recent Kindle read, “Barbarians At The Gate” was especially valuable in encouraging me to step outside of the current startup funding paradigms, and really evaluate the way that shifts in financing models can dramatically alter an industry.

A bit of background on “Barbarians at the Gate”: The story of one of the largest Leveraged Buyouts in History, “Barbarians” follows the twisting narratives of the various players attempting to complete the $25 billion buyout of RJR Nabisco.  More importantly, it also explores the incredible phenomena that was the LBO craze of the 1980′s.  This shift would eventually have enormous consequences for resource allocation, corporate organization and institutional investing.  The book is a phenomenal (if lengthy) read, and I highly recommend it.

The book does a great job of following the deeply personal stories of executives and investors who are watching every semblance of “normalcy” in their industry get flipped upside down.  Reading these stories of disruption really got me thinking about how the Startup world would handle such a similar disruption.

I’m not referring to a bubble bursting (we’ve seen that before), or to relatively minor disruptions like the rise of seed stage financing.  Instead, i’m talking about a wholesale shift in the very core of how startups are built, funded, and acquired.  What if institutional investors leave the venture capital world en masse as pension funds take an enormous hit in the coming entitlement crisis?  What if a new class of fund comes into existence that seeks to aggressively acquire startups along a specific vertical or horizontal chain of integration?  (UberMedia 2.0?)  Will the second and third tiers of consumer web startups be aggregated into modern “conglomerates” in a search for relevance and profitability?

I recognize that these “What-ifs” may seem odd or impossible, but thats exactly the point. If you had told a room of corporate executives in 1979 that the next decade would see the $25 billion dollar Private acquisition of an enormous food and tobacco conglomerate, they would have laughed you out of the room.  My goal is not to predict these potential shifts, or to even pretend to understand their potential implications.  In fact, Black Swan theory would argue that nobody has the ability to predict the way these coming changes will happen.  The only guarantee that anyone can make is that the current model will not last forever.  Bubbles will come and go.   Minor disruptions will alter the valuation environment. Eventually, the entire underpinnings of startup finance and acquisitions will see massive changes.

 

Of course, in the end, the only important question is this: When the Startup world gets flipped upside down, which side of history will you be on?