Honey, I Shrunk the Startups!

Barack Obama and John McCain are going to spend the next two months arguing over the economy, mostly about how to foster innovation. The politicians blame politics. In last Sunday’s New York Times, Cisco & Google engineering executives talked about the same problem. They blame the lack of engineers.

Both are right. But the real problem isn’t that we have to be wiser or smarter. We just have to keep taking big risks. Taking big risks is where Americans have always stood head and shoulders above everyone else: get-rich-quick schemes have been our specialty. But now the new fashion among the professional risk-takers has been to risk very little.

$100,000 is the New $10 Million
Venture capitalists are racing to miniaturize themselves toward the vanishing point. One of my favorite bloggers, Fred Wilson, recently asked why not “back 10 teams at $25,000 each instead of one team at $250,000”? Just last week a Seattle venture capitalist boasted that “we are seeing impressive companies being built for under $100,000.”

To which one can only say: Really? Which companies?

Just do the math. Two engineers can last 12 months on $100,000, which is great for building a prototype, but often nowhere near enough to build an ambitious product, much less a business. Yes, hardware and software have become nearly free, but people have always been a startup’s main cost.

Spending Less, Doing Less
What’s usually happening is we’re spending less by doing less. Behind the steady drumbeat of startups, any TechCrunch reader can’t help but notice how whimsical many have become.

Trading college-girl gossip or graphing rock-band popularity is cool but we also need entrepreneurs willing to spend the time and money to f*** with the order of things. Rather than building game-changing technologies that can make an entire segment of the economy better, most startups are using what’s already out there to create a new media site. Silicon Valley, meet Hollywood.

What’s Really Scary: Nobody’s Scared
Everyone knows that last quarter was the first since 1978 that a venture-financed company didn’t go public. Mid-stage capital dropped 15%. Late-stage investing is now cashing out entrepreneurs before their companies have made money. And what’s really scary is that nobody’s scared.

Bill Gurley says an IPO isn’t worth the Sarbanes-Oxley headaches. Others are just waiting for the market to tick up. But if those were the real problems, we’d see more accretive acquisitions. Instead, even YouTube is struggling to make money for Google.

Most entrepreneurs don’t even aspire to build a self-sustaining business. Among the 25-year-old entrepreneurs I know, that goal seems as dated as the Brezhnev-era Red Army.

You Want to Get Funded? Think Small
It’s an attitude investors have encouraged. When I came of age in the 1990’s, VCs were always challenging entrepreneurs to think big. It helped shake us out of our navel-gazing reverie and into a broader world. Now, chastened by over-funded companies from the dot.com boom, many investors look for ways to cut an idea down to size.

Of course, some businesses don’t need a lot of money to get big. Others are happy to remain small. But there are big ideas that take time and money, and though there is still plenty of funding available, no one could deny the mood among Internet startups has changed.

Could Amazon’s Jeff Bezos show up on Sand Hill Road today to pitch a company that would lose money on software, on warehouses and distribution centers – for years? He might get his idea funded; he’d more likely get talked out of it. It’s so easy to nudge enterpreneurs — and people in general — toward smaller things.

What I’m Looking for in TechCrunch50
We can’t all be Amazon. But we do have to make sure that the volatile mix of money and energy – which occurs in only a few places, at a few moments in history — can still easily form around the big ideas, not just the small ones. This is why everyone is eager — why am I so insanely eager? — to see what TechCrunch 50 delivers: will startups debuting at tomorrow’s big conference make Silicon Valley’s place in the economy smaller or bigger?

The judges may argue over which contestant is the most clever or polished, but for those of you scoring at home, there’s room on the card for another column. Which startup is most likely to f*** with the order of things? We need a few of those too.