A Flip/Flop Bubble of Microventures?

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Vinod Khosla is getting back into seed funding something closer to what BusinessWeek…

calls his golden era where half of his investments were less than a buck ($1M).

To wit Paul Kedrosky comments:

    As one GP put it to me recently when I described our seed investment style here in San Diego, “You put as much as work into seed investments as you do into larger ones, but the management fee is lower and you have to make more investments & track more deals. Where’s the incentive?” Absolutely. Agreed. Stay away.

And the entrepreneur cringes. It’s easy for me to say when I have passed it, but the seed round underpins everything in the valley. During the bust, all the Angels died and went to heaven. Luckily, some of those that did well during the boom stayed in the game and seeded most of the great new companies known today.

The incentive, putting aside the carry, is higher risk/reward. But it is also the opportunity to develop white space markets. A different kind of challenge I think both entrepreneurs and great investors appreciate. The other approach is short-term investing, which VCs don’t do, in theory.

Which brings me to the new micro-bubble. Not related to the Khosla story, there are a ton of former entrepreneurs getting back in the game these days. The lure isn’t just that markets are opening again. A mindset is developing in the valley that you can and should develop startups for quick flips. If you have your own cash, you can seed a play like this yourself, filling a targeted niche — both in product, market and engineering expertise. I even heard of a major portal getting into seed funding to encourage it. Perhaps this whole thing was started by Google’s micro-acquisitions. I don’t have any data on this trend, as it is the most private part of equity, but it is the talk of many a Silicon Valley coffee shop.

I’ve always believed the VC No of “is it a product, or a feature” is lazy thinking. All great products start as features and great teams evolve them with a mission in mind. The flip approach avoids this entirely. Just focus on the feature. Think for a minute how inefficient a market can be when the spoils of a previous bubble can be invested by seeding flips targeted to buyers instead of companies targeting real customers with real business models.

When the latter is considered contrarian thinking, here we go again, although microventures certainly limit the scale of inefficiency. To argue the other side, this can be a boon for buyers, a market mechanism for R&D that is relatively efficient. But I have to wonder what happens when this private market activity rolls up to public equity pricing, and the amount of creative destruction this could incent.

I am a big believer in developing a company with the goal of making it as great as can be, with an eye on exit in public markets. I look M&A exits as options along the way. The problem is when you build to flip, you may be focused, but short sighted. Essentially, you loose IPO as the exit option and M&A opportunities you can’t foresee.

My grandpa taught me the difference between an entrepreneur and a businessman is the entrepreneur is in it for the quick flip, while a businessman makes a lasting contribution to the community.

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Ross Mayfield is CEO and co-founder of Socialtext, an emerging provider of Enterprise Social Software that dramatically increases group productivity and develops a group memory.

He also writes Ross Mayfield’s Weblog which focuses on markets, technology and musings.

A Flip/Flop Bubble of Microventures?
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