| HN Mirror

> Where are they going to get investments from?

Great question.

Probably people and organizations who are not looking for a typical SV portfolio (essentially many strike outs and a few home runs that are determined over a specific and relatively short timeline).

SV VCs started out as financiers that were supplying a lot of capital to start capital-intensive businesses (e.g., chip fabs). They are still largely designed to do that, but many businesses can be started and often grown with relatively small amounts of capital. These cheap-to-start businesses are often not served well by the SV VC model.

Some ideas:

1. The companies that are looking to control a complete market will still go to SV VCs.

2. For the companies whose business model doesn’t match the SV VC model, they will go elsewhere. They are doing it now. Specifically, some companies may be capped at growth due to the market size, the nature of the market, etc. When these companies use SG VC, they usually end up just fizzling out, even though the company could have been viable and stable at a small market cap (specifically, a number that would not move VC overall returns but would be large for most founders).

3. I expect the money will come from people and organizations that are happy with consistent, long-term, above average returns — basically focusing on more singles and doubles rather than home runs (to continue the baseball analogy). This might mean more debt rather than equity (unless a company chooses to go public). This might mean that institutional investors could struggle to find a single place or set of places to park large chunks of their money. This might mean that the investors play a key role in the business (e.g., a payment processor supplying short term loans based on historical cash flow).

4. Some of SV’s largest funders (LPs) may find themselves struggling to have significant access to this market, at least at first. Many of the companies and people who are in the best place to make these investments don’t need their money to participate. This could change — for example, payment processors could open up tranches of debt for companies that use their service, or private equity could end up taking a more proactive role in buying and developing businesses. It’s tough to say.

5. If I had to take a stab at what the “end game” of startup ecosystem 2.0 looks like, I would guess that most of these startups remain founder-led until exit. Exits will be relatively small (9 digits or less, usually less). Startups will be purchased by PE and will be developed and flipped. At some point in the chain, the amount of money involved will be high enough to involve substantial institutional money, and the institutional money will get involved though some sort of PE vehicle.

Note that #5 isn’t exactly original — it’s happening now with some PE firms. The main differences I see is that viable small companies won’t be run into the ground trying to hit home runs, and PE will be much more proactive in business building from a much earlier stage.

To build on my original response… why Austin?

- Plenty of land to expand still. This means affordable housing somewhere near Austin should be possible for a long while.

- A great university with a solid engineering department is nearby.

- No state taxes (big strike against CA).

- Interesting city center that is walkable/bikeable if you choose to live there. Overall metropolitan area is desirable — people have been gravitating there for decades now.

- Moderate weather for most of the year (summers are rough but manageable). Definitely not California good, but definitely not Northeast bad either.

- A relatively quiet tech scene that has been growing for decades that can supply mentorship, contacts, and (if necessary) money.