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Small Business Venture Capital Dries Up

By: Steve Johnson

1/22/2009 - 16 Comments

The other day I was reading about how Venture Capital money used by startup businesses has dried up and now even Silicon Valley is struggling.

Several years ago, I tried to get my hands on some Venture Capital money to launch a new business but I was turned down.

That experience led me to give up on the VC funding and made me realize how clueless these rich people are that give out VC money. 

Many of the business that get VC funding don't have a clue.  It comes down to if they believe in you personally or not. 

Since then, I have built my business in spite of not getting VC funding and for the better. I learned that a large part (90%) of the process comes down to who you know – rather than how good you are. If you know the right people, you can be a complete idiot and still get funded.

The Positives of the Reduction in VC

In light of my experience with VC’s and the position my business is in right now, in some ways its good that they have dried up.  With the VC’s gone, the self-funded small businesses can grow without having to compete with these kids and their dad’s millions of dollars.

It’s time we get back to fundamental business strategies like hard work, customer relations and sales.  I’m not saying that I don’t want to see more small businesses, it fact just the opposite. This is perhaps the best time to start a business in decades and I think millions of new businesses will be started in the next few years - and they will be more healthy businesses because they will have to grow without dad’s money (VC) to gamble with. They will have to be productive from the start, producing results and innovating. The loss of VC money will be good for many small businesses that are financially sound.

Opportunities Abound

On a personal note, the reduction in 'easy money' has made it much harder for new startups to compete with us or under price our products by trying to sell below their costs to gain customers until they get enough customers to support their business. 

This process of buying customers with borrowed money is completely over. Along with using free products that are used to bait customers into switching suppliers.  The reduction of 'easy money' will reduce competition, which means higher prices (inflation) and fewer options for customers.  This will increase the demand on the businesses that are well established.

The Negatives of the Reduction in VC

On the other side, many great businesses have come from VC funding that would have never been possible without VC funding.  Sometimes it take a lot of gambling before you hit it big. Those big hits, like Google for example, change the world and employ thousands of people. 

Gambling on business is what VC’s are all about. Anyone can gamble with a $1 lottery tickets, but only the very rich can gamble millions on new businesses.  The stock market crash has reduced the very rich to just being rich, which has drastically reduced their risk tolerance for gambling with new businesses.  The reduction in VC funding will surely reduce the number of businesses that have the potential to create thousands of jobs.

The risky nature of VC funding produces a volatile cycle with a quick pullback whenever there is an economic downturn and a quick upswing when the economy is booming.  The rich always find a way to become very rich and as soon as they do again VC funding will be back in play.

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