We're in circles—that's for sure. Let's be clear, much of the "froth," as it were, is in the consumer Internet space. If you're in other areas of technology like data storage in the cloud, this doesn't apply to you. And if you're in biotech, well, God bless.
As I see it, there are three circles. There is the bootstrap circle, the Angel circle, and the Venture Capital circle. The bootstrap circle is as it's always been—difficult. This is when the entrepreneur funds their business from their own savings or friends and family. It's a slower slog and those who pursue this route are usually in it to build a long-term sustainable business.
There are some Angels who will talk about funding companies built to last, but their investment approach looks like the Series A rounds of VCs of yore. This often puts the bootstrapped entrepreneur in a bit of a bind. It means an entrepreneur has to fund a heck of a lot more of the business out of pocket—effectively making this route only viable for wealthier individuals.
The Angel circle is where there are some soap bubbles. This is the space that's getting most of the media attention. Most Angels are throwing a lot against the wall and seeing what sticks. Because they don't know what will take off they're investing in many "companies." I put companies in quotes because these are usually 3 people teams and often guys in their twenties who can get by with next to nothing in salary for at least a year or so.
Angels only want to put about $100K to $150K to work in these "companies" and ideally, to make their own IRR work, they want the company to be acquired within 18 to 24 months without having to take subsequent venture capital. Taking VC money often means the Angel is diluted in its ownership % of the company and many, in the long run, make nothing on their money. Therefore, companies built to flip are centered in this circle. This in turns means, Angels are funding primarily point solutions (extremely narrow concepts or features) and mobile applications.
The VC circle is where there are some bigger bubbles but in only one small space of the Silicon Valley bathtub: very large consumer plays like the Twitters of the world. These are the companies with consumer counts in the multiple millions and/or significant revenue traction. Where five years ago one could obtain venture financing without much in revenues and it was go big or go home, now it's if you're not big, go home.
Today, in the Valley, the worst place to be is somewhere more than 100,000 users (meaning you've been around for a while but still haven't attracted a tipping point of users) but less than one million. Long gone, it seems, are the days when businesses took time to amass consumers and slowly ramped. Today, an entrepreneur has to be really clear about which game she's playing. If not, she'll end up going in circles.
Find Alicia soaping up at www.aliciamorga.com.