Unicorns, Cheshire Cats, and the New Dilemmas of Entrepreneurial Finance (by BRIE from @UCBerkeley)

Interesting report on the "new economy" by BRIE, Berkeley Roundtable on the International Economy.

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It is difficult to be certain which of the changes we describe are permanent and which are transient. The technical changes that are easing entry seem to be part of a permanent environmental change. The technical diminution of entry barriers, however, may be balanced by the remarkable power of the incumbent platform giants. Effectively, the preponderance of these new entrants may be subsumed into the platform giant’s ecosystem and thus face constrained growth opportunities. Exactly what the ultimate balance will be is difficult to predict. 

While, the technological changes and the tensions between eased entry and platform power to control ecosystem complementors can be expected, the changes in the financial sector are far more opaque. For example, if there is a financial crisis, such as those in either 2000 or 2008, which types of financial intermediaries will continue to be active in funding startups? Will angels and accelerators still have sufficient capital, and, if as is likely, only the best ones survive, what will be the implications for the enormous number of startups currently operating? Even more uncertain is whether the organizations that have been providing funding for the later growth phases, where large sums of capital are required, will continue their support. The situation would become particularly precarious if the IPO and acquisition markets were to freeze up simultaneously, as these private investors would be called upon to commit capital at the very time when they were experiencing a capital squeeze. From a political economic perspective, because in most of these firms the assets are largely software and data, liquidations are likely to be nearly total with little residual value remaining.Oddly, our conclusion is contradictory. The powerful transformative forces currently at work driven by the move to a platform-centric economy appear to be inexorable. And yet, the capital necessary to nurture many of these transformative firms is dependent upon a robust flow of capital, particularly since as we demonstrated, IPOs as exits have declined markedly and did not recover significantly despite the passage of the JOBS Act. If these alternative sources of capital are no longer available and the capital markets are closed, then the startups that do have significant potential will be forced to either sell themselves to the platform giants or fail outright. The implications are that the incumbents will be able to purchase the firms that Schumpeter suggested would replace the existing firms. 

It is symbolic of global acceptance that the Silicon Valley model for innovation and entrepreneurship exemplified by its capture by one dominant form of entrepreneurship, the venture- backed Unicorn, is the best type of firm to be supported and such entrepreneurship is a path equally available to all. This model is embraced by both local governments and educational institutions as an optimal economic development goal. The result has been a proliferation of accelerators, incubators, entrepreneurship courses and programs, etc., that themselves lower start-up entry barriers, thus reinforcing the phenomenon of competitive commoditization. This narrative advances the view that the venture-backed startup – in reality, a narrow class of startups that can quickly grow to a large scale over a decade or less is the most desirable model. 

This essay calls those conclusions into question.