Angel investor

The implications of too much VC money and too little startup talent

November 16, 2010: 12:03 PM ET

From mass raises at Google to angels oversubscribing the latest hot startup, Silicon Valley is flush with cash, but short on talent. Believe it or not, that's mostly a good thing.

By JS Cournoyer, contributor

Sand Hill Road sign from 280 north.

Image via Wikipedia

The world of early stage investing is changing in ways that are reminiscent to the tech bubble of 1999. As Fred Wilson points out in "Storm Clouds" that investors are behaving badly, making $5M to $15M investments in web startups in days, without proper due diligence. Even larger web companies like Facebook and Google (GOOG) are contributing to the madness, paying tens of millions of dollars to acquire companies to shut them down, just to get access to their engineers. According to a story by Mike Arrington, Google even gave an engineer a $3.5M package to stay with the company. Are we in another bubble that's about to burst and take us all with it? What does this all mean for entrepreneurs, engineers, investors and startups?

I believe we can use the simple laws of supply and demand to understand the situation and give ourselves a framework we can use to better prepare ourselves for what lies ahead.

We can look at our ecosystem as the combination of two markets: the startup market and the IT market. By IT market I mean large companies in the greater IT sector (web, Internet, mobile, software, gaming, advertising, etc.) such as Google, Apple (AAPL), Microsoft (MSFT) and Facebook that are an integral part of the startup ecosystem. Both markets need the same basic resources to thrive: infrastructure (computing power, storage and bandwidth), customers or revenues, capital (angels, VCs and public markets), ideas/products and talent (engineering and management). The two markets have also had a symbiotic relationship over the years that is now at risk due to an important imbalance in the supply and demand curves of capital and talent. For years, startups have been considered a resource in the larger IT market. Large IT companies have used startups to fill gaps in their product roadmap (ideas/products) and acquire qualified engineers (talent). Large IT companies have also been a major part of the startup market either as partners, customers, competitors, investors or acquirers, fueling the virtuous circle that makes the startup ecosystem viable. More

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