Entrepreneurs - Count Chickens as they hatch or wait for Black Swans?

Piece in TechCrunch on the shifts in the startup funding markets changin from the old pecking order:

Today things are much more complicated. More funds are arguably in the top tier – guys like Accel, Andreessen and Greylock have risen. But more disruptive are the angel investors. It used to be that angels worked with venture funds, doing the very early rounds and then handing things off when a company did well.

But the last several years have seen the rise of the cheap startup. Internet startups can use open source software and new scripting languages to ship products fast and cheap. Often there’s no need to go past an angel round of funding until it’s time to decide between selling and doing a big marketing push. Either way the VCs lose, because even if they get in at that late stage the valuations are much higher and returns plummet.

An entire generation of entrepreneurs have stopped thinking about hitting up those top tier VCs as their first step in the startup process. Many now simply begin with Y Combinator, or take a small angel round. These angels are fast and nimble and they are hanging out with the entrepreneurs at events, incubators, etc. They are in the fray, while many of the old VCs remain above it all, waiting for the entrepreneurs to come to them, hat in hand.

In my view the main issue is that market re-structuring is all very interesting, but the big thing underlying this is that what is happening is that money is flooding in again, and that will lead to asset bubbles - as with the pre Crunch Private Equity markets, too much cash chasing to few opportunities pushes up the prices. To exacerbate this, it does cost less to get companies up and running (but probably more to make a market in a world full of many small companies0so the funding stages have to be changed as well.

But the one thing that caught my eye was a shift in the payback theory of the startup market - it would appear that the market is shifting to many smaller companies being sold for far lower prices, and this is impacting the traditional "1 in 10 is a home run" model:

Some venture capitalists think that this “think small” attitude is driving entrepreneurs who may otherwise build the next Google or Microsoft to create something much less interesting instead, and then everyone loses. No IPO. No 20,000 tech jobs. No new buyer out there for the startups that don’t quite make it.

And without those occasional but huge exits, the entire ecosystem can fail. Venture firms need big returns to raise new funds. Without venture money a lot of the innovation in Silicon Valley would end.

I have always felt that the "home run" model's returns fitted better with the big VC fund business model rather than the individual entrepreneur. For most entrepreneurs I would argue that - as a game theory payoff - a reasonable probability of a few million dollars exit for a few years work is a more enticing prospect than an exceedingly small probability of a vey large exit.

In other words, would you prefer to count your chickens as they hatch or wait for a very rare Black Swan to show up?

I suspect this shift in the rules of the game is because, as money flows in, the power is going to the rarer entity - the good startup.

(Update - and another TechCrunch article points out that you don't need home runs to create the new jobs - large numbers of small successes are doing most of the heavy lifting)

Incidentally, having run and/or turned around a number of Tech startups, I would point to Fred Destin's post here as the key to that succesful exit:

In startups the only real sin is running out of cash, and the cardinal sin is running out of cash UNEXPECTEDLY.

Exactly - never mind the team, market or product - they are irrelevant if the company cannot manage its cash.