Tim Oren on Two Stage Ventures

On 2005-01-27 20:53:00, Allan Engelhardt wrote in CYBAEA Journal:

Tim Oren is one of the consistently insightful venture capital bloggers, and his latest post, New Model Software Startups: Two Stage Ventures articulates a very strong trend that I have seen for some time but has not been exactly able to express. Interesting that it should be the same story at the same time on both sides of the Atlantic.

Tim identifies a new pattern in startups which he calls the two stage venture. He focuses on software, but I don't think that is important. In the first stage, the venture builds a useful product as cheaply as possible focusing ruthlessly on the value differentiators.

Build as little as possible, as fast and cheaply as possible, while demonstrating some unique value.

The second stage is either a trade sale or a venture capital expansion phase. For the second option, Tim predicts that the entrepreneurs will receive valuations well above what they would have commanded before achieving a first stage takeoff because some of the risk has been taken away. For the first, he suggests that the market has genuinely changed:

While the [trade] sale may result in only a few million dollars, that outcome may be quite profitable to the founders and the individual backers. This may even be true on a risk adjusted basis, and that may be a new thing.

This is exactly the pattern I have seen here in Europe, especially over the last year or so. Consistently, the companies I have seen that have been successful have followed this path and consistently the ones that have failed to achieve success have not followed this approach.

Are other people seeing the same thing? Why this change now?

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