Why Less Investment Can be Good

Rich Tehrani : Communications and Technology Blog - Tehrani.com
Rich Tehrani
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Why Less Investment Can be Good

It seems the common sentiment is the lower amount of venture capital we see today is negative for the US economy. The New York Times even says we are in a VC crisis. Let me give you a contrarian point of view based on my experience in the late nineties. When the Telecom Act of 1996 was passed, VCs flooded the market with billions of dollars to create thousands of CLECS looking to take a piece of the communications market from the handful of incumbents.

What ended up happening was too many investment dollars chased too few sales dollars and the model disintegrated. Similar to what happened in the financial meltdown, the system collapsed under the sheer weight of the collective excess of investment. Do I need to even say the words dotcom crash ?

Did we need the competitive telecom market to increase from a few players to a few hundred in every medium-sized city overnight? Obviously not.

So when I read articles about VCs being cautious and companies spending less money to attain new patents and keep existing ones, I realize this is a good thing because it will become easier for companies with good ideas to become successful.

I would argue if the Telecom Act of 1996 were passed in this economic climate, there would be far fewer CLECs started and each new company would have far greater odds at success.

With the spread of information being so rapid, a good business idea circulates the world in nanoseconds meaning that competition is brutal for any industry which cannot sufficiently build barriers to entry.

I can't even imagine how tough it must be to launch a new green technology company today.

And when 50 companies are launched in the same market and all of them are building barriers to entry, the end-result is none of them really have the barriers they think they have.

Of course I am one of the biggest proponents of marketing your way through a recession. I also believe you need to innovate your way through. But the reality is there will be less spending on both these areas than there should be, which means if you have a good business model and can innovate and market while others are distracted, you could become the next IBM, Google or GE.

Yes we are in a tough economic climate but those that make it through without cutting themselves to the bone will be best positioned for rapid growth in the future.



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