Keith Teare, TechCrunch founder, traces venture capital from the 1990s dot-com boom through the post-2008 shift toward angel investors and microfunds. He raised large rounds for AltaVista and RealNames, watched the bubble burst, and now sees founders chasing traction over vision in a short-term funding model.
Chapters
So why am I telling you that story? Venture capital in 1996, '97, '98, '99 was nothing like it is today. Nothing like it is today. It was a different world. You still had to get traction. I got my AltaVista deal. That's what got me the investment. But you could go straight to an A round with your initial traction, and I raised $130 million in 2 years through venture capital. That's amazing. about 5 rounds. Microsoft took 20% of the company, and VeriSign that sells the .coms took 10% of the company. And we had a worldwide sales system through Microsoft browser and VeriSign, and it took 3 years. We went to 350 people by '99, then the bubble burst. Guess what? We didn't do an IPO because the bubble burst. And we went down to 80 people in the next 12 months, but raised $70 million to do it and got profitable by 2002. So venture capital came from Sand Hill Road only, from people like Draper Fisher Jurvetson and all the big names, and that was the game. Well, after the bubble burst, They disappeared. They completely disappeared. If you ask Tim about the history of Draper University— I should turn this off, but that's not easy to do while talking— he will tell you that the unraveling of Draper Fisher probably started around 2000. If he traced it back, he could probably— because it was a traumatic impact, the bubble bursting. And the people who invest in venture funds didn't want to take risk anymore. Okay, I'm going to turn this off now. This is my 11-year-old son who's on school vacation. And let me turn this off. There we go. I'm not bringing him into the room. He's not well behaved. So it was called the nuclear winter. Literally from 2000 to about 2005, there was no VC investment in the Valley. That's the second phase. It just was— nobody was writing checks for almost anything. Of course, there are exceptions, but mostly they weren't. 2005 comes around, and that's when I created Archimedes Labs, and me and Mike were— I'm sorry, who are you? to partners in Archimedes Labs, Mike Arrington. And out of that, we did TechCrunch and Edge.io. And we rented a house in Menlo Park that had an acre, and we started doing TechCrunch parties. The first one had 40 people at it. Chad Hurley was one of the 40 people who invented YouTube. The founder of Pandora was one of the 40 people. It was just the beginning of Web 2.0. And Chad Hurley was standing on the sofa doing a show and tell of YouTube. And no one would invest in them. There was no one to invest. What happened is angels started to come to those meetings. Jeff Klavier, who now runs SoftBank VC, was then just an individual. He was there. And SoftBank VC today is in its 4th fund, I think. It's $130 million or something now. But then it was just Jeff with his own money. And angels started investing in Web 2.0 startups. And some angels, by about 2008, raised funds. That's when 500 Startups and YC were formed, around 2008. And what we today call microfunds started to form. SoftTech VC was one of the first, but there's now 400 microfunds in Silicon Valley, 400. What is a microfund? A fund with less than $100 million under management. So it's not that micro. Some of them are very small, but some of them are getting bigger now. Mike Maples at Floodgate is one of them. Hunter Walk at Homebrew, Aileen Lee at Cowboy Ventures. You know, there's a lot of— these are microfunds. And they do seed entry. late seed normally, but seed entry. Some of them have graduated to only do A rounds. SoftTech VC mostly does A rounds now, so they've kind of grown up. But they filled the vacuum left by the old VCs. That coincided with something called Lean Startup. So you've probably all learned about Lean Startup. Well, Lean Startup is— it was originally a development methodology, how to iterate fast on a code base. it began to be interpreted as cheap startup. That is to say, no one gets paid and you bootstrap. And the reason that happened is because there was no money. And so these microfunds and YC and 500 started to fill the vacuum and create what is today's VC world. Now, what characterizes today's VC world is the opposite of what I described to you in the first half. In the first half, I described long-term, near-future ideas. But the post-2008 VC landscape is asking for short-term, 3-month, demo day fixes. So you guys are all incented to act fast and think short-term. You're not incented to do what I did, which is paint a big picture, do it, and raise a lot of money to make it possible. You will be drip-fed, you know, $100K, $200K, if you're really lucky, $500K or $1 million. You might do 3 to 5 rounds of financing before you get to an A round, by which time you've given up what, maybe, maybe half your company, maybe more, maybe a bit less, but a lot. You'll have given up a lot. And almost nobody is going to give you the $5 million from the initial deal that I was able to do with Real Names. Almost nobody will do that. So that's the background. How do you operate in such an environment? Well, rule number 1, you really don't want to be the guy proving that you've got traction. If you are the guy or girl proving that you've got traction, you're in a conversation about raising a small amount of money, because these investors want you to have traction in order to allow you— them to give you certainly under $1 million. So the traction conversation is a trap to be avoided. It's like in the World Cup, you know, when the game has just kicked off and England scores against Colombia and it's 1-0. You say, oh, it's obvious, I know the result, I know who's going to win. Well, no, you don't. You don't know who's going to win. Traction is almost irrelevant to future outcome, almost irrelevant. But there's such little long-term thinking happening in the Valley today. That traction is the currency you have to trade on to even get attention. That is a broken ecosystem from the point of view of the future and innovation. It's not a good thing. It's basically a short-term hurdle-based approach to investing.
