Dan Case's Next Great IPO (Intellectual Public Offering)

The mania around technology by financial markets is a time-honored American tradition that has been repeated with every major infrastructure wave in our history. A lot of money gets wasted, but America becomes a stronger place every time this happens. Think back to 1985. Sure, the failure rate among startups went way up. But some of the most important companies scaled fastest in that same period of time too. AOL, Microsoft, and Oracle broke away from their competitors when a downturn gave them a little bit of an edge in competing for people and money. There was less competition for talent and capital, and a less noisy market in which to send messages.

I think we've entered that phase again. Most industries, when they mature, become places where the middle dies. You either want to be at the top, as a full-service global provider, or you want to be a niche player -- which can still be profitable. You just don't want to get stuck in the middle. That will be even more painful in the next five years than it was in the past five years.

We went through that very phenomenon at H&Q, by the way. We made a series of strategic decisions in our firm in 1994. We believed that technology, innovation, and macroeconomic factors such as globalization, demographics, the spread of free markets -- as well as the maturity of the entrepreneurial base -- were all going to create a "cycle-skipping opportunity," a period of prolonged entrepreneurial value creation and productivity gains, which has in fact happened. So we basically made a decision to bet our firm on the intersection of entrepreneurial activity in the capital markets, in areas characterized by innovation and structural change. And that has been an exciting, profitable, enduring -- but also humbling -- experience.

It's humbling that the world of entrepreneurial finance outgrew one of the fastest-growing investment banks. It's humbling that for all we were able to achieve, we did not have the global reach, the products, the capital, or the scale to grow with our great companies. So many companies, ones where we had a huge advantage of understanding them, their origins, and their people, needed to move on -- or thought they needed to move on -- to larger financial firms. I think that's humbling.

Risk Factors I: If any of the following risks occur, involving people or leadership but not technology or capital, then business and financial conditions would likely suffer.

The most important constraint over the next five years isn't going to be a slowdown in innovation or the absence of a big structural change like the Internet. The constraint is going to be people and their experiences and values. That's where veteran entrepreneurs and angel investors have a very important role to play. And it gets even more important as venture-capital firms become larger and larger and lose their ability to work on small transactions.

The risk is that a generation of great technology leaders have never been this big before. They've brought their technologies this far, but now they have to build foundations for endurance. We call it "wind sprints in the marathon," which means that sometimes you have to speed up, but you can't ever slow down. The most important quality we look for as investment bankers is whether a company has a long-term, sustainable advantage and whether it has people with the will and the skill to execute against that.

Risk Factors II: That's not all. There's another big challenge.

The catch-22 that early-stage companies always face is that they must weigh the advantage of time to market against the risk of not building a strong enough foundation. The situation gets played out in almost every decision made: product completeness versus product breadth, distribution strategy, capital structure, geography. Entrepreneurial companies have to fight that trade-off all the time.

Risk Factors III: If you thought that was bad, read this -- especially if you want to build a great company.

I worry that the Lego-construction-set approach to companies has gone too far and that human ability to adapt and change and build teams and own a culture -- and to do that again and again, disconnecting and reconnecting -- is reaching some kind of limit. If you look at the people who built great companies over long periods of time, they usually had great products and a great ability to spot the market. But what really made them scale was their unending commitment to finding and hiring great people who could work together -- and their ability to take the long view.

There's a generation of entrepreneurs that have made a lot of money, and we need to see how many of them will be motivated to contribute meaningfully in the period ahead. Basically, some of them have grown up in great times. We'll have to see how many from that generation can endure. They may be too spoiled. I'm more optimistic about the ability of successful, older, rich guys to contribute than I am about the skills of the nouveau riche to endure. It's like raising kids: If you spoil them early, it lasts for a long, long time.