Good Times for Entrepreneurs?

Entrepreneurship has become attractive...considering the alternatives

Entrepreneurship has been in style for quite some time here in the United States. Ever since the last stock market bubble at the turn of the millennium, people have learned to appreicate the fiery spirit of the agile, small-cap companies. The business atmosphere gave rise to new entrepreneurs, held accountable to provide real business models to support their valuations.

However, in recent years Web 2.0 start-ups had been creating a bubble for the risk capital that is so essential for entrepreneurial firms. Just browse some of the companies on TradeVibes and you get a feel for some of the frivolity that once again characterized the web space. Several millions in VC money were thrown at some also-ran concepts. I mean, how many video sharing websites can the market support? How many x's, v's, and z's do you need in your domain name? (If these entrepreneurs were pushing pills it would be one thing, but people actually have to type these domain names into an address bar.)

So, what happened to the Web 2.0 bubble burst? It was precluded by the credit crisis, making a few goofy VC-backed deals look like child's play. The end result, however, is the same. There's very little capital out there for start-ups. Even some of the most legitimate companies and most enticing deals are met with undue friction, if not all-out rejection. It's a simple supply problem: Trillions of dollars in capital were sucked out of the economy in the matter of a few months!

I have seen the consequences of this firsthand, although in a somewhat contrived format. When I was at the Venture Capital Investment Competition in Boulder last week, I was shocked at the low valuations offered by some of the MBA teams. Even more telling were the reactions by the vast majority of the VC judges. Our team ended up offering the highest pre-money valuation to the entrepreneurs than any other team. While I am limited in what I can say about the company in question due to an NDA, I will say that my instinct (and analysis!) told me that the company was worth much more than what the judges wanted to admit. However, I'm not one to fight the market. If capital is limited, valuations will be depressed. Period. Lesson learned.

To many of you this may be perfectly obvious. Of course, if the economy is doing poorly start-up capital is scarce and the market opportunity for most businesses is dwindling--if existent at all. However, I feel compelled to set the record straight because many people are now attracted to entrepreneurship, some even saying that it's a great opportunity to become an entrepreneur. While this might be the case, it could only be because of a lack of options.

Taking the rose-tinted glasses off for a second, one must realize that entrepreneurship is still about money. Cash flows are the lifeblood of entrepreneurial firms and there's currently very little cash to "flow" around. Start-up capital is minimal, and--perhaps more importantly--consumers have a lot less money to spend. It's true that an entrepreneur might be able to scale down for a few years of austerity and position himself for better times, but not everyone has that luxury. Many businesses are heavy on capital expenditures and hefty overhead costs. On a more personal note, many people have mortgages and dependent children.

Putting the rose-tinted glasses back on, one must also admit that these trying times could present opportunities to the most creative among us who can adapt to the changing times and innovate in product, process, or business model. I have no doubt that entrepreneurs will play a lead role in the turnaround of the (world) economy, creating value through innovative products and services, and creating jobs for the would-be unemployed.

However, it is dangerous to make a blanket statement in praise of the opportunities in entrepreneurship. It might seem attractive because of the recent dramatic decrease in opportunity costs, but the market is tough out there...people aren't getting fired because of a favorable business climate.

So, try your hand as an entrepreneur, but only if you have the huevos or the great fortune to withstand a bumpy ride. If you're doing it for quick money and fanfare, you might want to wait for the turnaround when there's some capital to be had.