The Capital Gap or Where are the $Billion Startups?

Paul Graham wrote an interesting essay "Why There Aren't More Googles" where he basically places the blame on reluctant VCs who won't invest small amounts on tiny startups.

So what's the real reason there aren't more Googles? Curiously enough, it's the same reason Google and Facebook have remained independent: money guys undervalue the most innovative startups.
The reason there aren't more Googles is not that investors encourage innovative startups to sell out, but that they won't even fund them.

There is a Capital Gap between the $50K from Friends and Family, and the $3M to $5M from VCs. But, that gap is being filled by Angel Investors who invested $26B in over 57,000 companies in 2007.

How many Billion dollar ideas are there? Angels in vested $26 Billion in 57,000 companies last year, while VCs invested another $29.4B in 3,813 companies in 2007. The problem isn't a lack of capital, or even a lack of entrepreneurs. It is a lack of disruptive big ideas that can generate a Billion dollars.

Most startups are acquired before they reach $1B. Look at the M&A numbers over the past few years. Last year there were $25.4B in M&A transactions compared to just $10.3B in IPOs.

Paul Graham and Y Combinator are hatching some really cool companies. Is there a Billion dollar company in there? Certainly there are some $50M ideas, but a Billion? Possibly, but unlikely.

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Comments

[Bob Warfield]

Au contrare.

The capital gap is not filled by Angels. Their average investment is $250K according to your own earlier post. It's a misnomer, meanwhile, to think that the VC's are really there at 3-5M. They'll offer their $3-5M after you have a product and traction.

So what if it costs you, say, $3-5M to get to a product and traction? In the old days, you could get those deals funded. Not any more.

Google itself raised $25M before revenue of any kind. How do you do that today?

More on my blog:

http://smoothspan.wordpress.com/2008/04/15/how-to-fix-venture-capital-part-2-the-opening-is-as-important-as-the-endgame/

Cheers,

BW

[Omer]

Get over it geeks. How many more entertainment/social websites do you need?

Personally, I envision VCs dumping money into nano/bio/green tech for those billion dollar ideas. Am, all for utility!!!

[Dave Ambrose]

I know the phrase, "Billion Dollar Idea/Company," may be figurative, but I see a lot of these companies starting out as trying to solve an initial problem and then think about ways to cash out.

[Paul]

All I know is I need better friends and family if most are ponying up $50K for a startup.

Raise your hand if you have a billion dollar idea...

[Joe Hunkins]

Don, another great "startup math" post. AS I think you are noting the idea that seed funding is lacking is ridiculous. In fact I'd suggest that historically in the Silicon Valley there has been *too much* easy funding, creating an ecosystem where it takes too long for the good and bad ideas to sort out, which in turn leads to faulty assumptions about what will actually work out in the real world.