This article originally ran on PEHub. If you prefer the super short version – I’ve summarized the post in the final section.

Many observers of the venture capital industry have questioned whether its best days are behind it. They are frustrated by the past decade of subpar returns for the sector. The most recent report to weigh in on the troubles of the industry was produced by the esteemed Kauffman Foundation.

There are obvious reasons the industry has had less-than-desirable returns, including: massive over-funding of the sector, huge increases in inexperienced venture capitalists that took a decade to peter out, and the massive correction in the value of the public stock markets that closed many exit opportunities for half a decade.

I can’t help feel a bit of rear-view mirror analysis in all of “VC model is broken” bears in our industry. I have been close to the tech & startup sectors for more than 20 years and I can’t think of a period in which I felt more optimistic about the innovation and value creation I see in front of us.

Looking ahead at the next decade I am excited by what I believe will be viewed as one of the best and most rational investment periods for venture capital due to seven discrete factors:

1. The number of startups being created has increased by an order of magnitude

Cloud computing and the open source movements have brought down the costs of starting a company by more than 90%. If you want to understand the details of why this is, I covered it in detail in this post, Understanding Changes in the Software Industry.

This has led to the creation of incubators, accelerators and seed funds. From this we have seen a commensurate boom in the number of startup companies. When I was graduated from university in 1991 it was only the really committed who eschewed the corporate world for creating tech startup businesses.

When I came out of college LA Law was one of the most popular shows on TV and made being a lawyer sexy, so most of my peers made that career choice.

But in 2012 a visit to any major college in America will show you the massive increase in aspirations of our young talent to become the next Mark Zuckerberg and build a future Facebook. The movie, “The Social Network” might have had more of an impact on creating future entrepreneurs than any other event of the past 5 years. Thank you, Aaron Sorkin!

Contrary to some press reporting, the boom in startups, the creation of accelerators and seed funds as well as the deserved popularity of AngelList do not signal doom for our industry. They are, in fact, great news for traditional venture capitalists. The most successful of these businesses will still need venture capital to scale their businesses.

They need a combination of capital and experience to separate from the rest of the pack – the low cost of starting a business means it is even more vital to become the market leader more quickly. What the explosion in startups really means for our industry is a much bigger pipeline of potential deals if we VC’s can be patient.

Yes, it’s true that FOMO (fear of missing out) is driving some irrational behavior and valuations amongst uber competitive deals and well-financed VCs. I’ve written in detail about that in this post, “On Bubbles, And Why We’ll Be Just Fine.”

It doesn’t seem too irrational for seed or A deals, just a bit higher than the norm. And by the C round it seems like investors feel more confident in setting a fair market value. But in a race to be sure you don’t miss the next Pinterest, some people are paying huge premiums for “market risk” B rounds. Some will pay off, others will not.

For those patient enough to source great companies at reasonable prices and prepared to weather the next inevitable downturn, I believe firmly there will be economic rewards for discipline and patience.

2. The number of venture capital funds has shrunk by two-thirds

To really assess what opportunities the VC industry has over the next decade, one needs to first look at some of the root causes of poor returns in the past decade.

The Funding Problem

In 1998 there were around 850 VC funds and by 2000 there were 2,300. Thomson Reuters data shows that around $10 billion of LP money went into VCs per year pre bubble. By 2000 the total LP commitments had mushroomed to more than $100 billion.

Everybody knows that most funds are 10-year funds (and that strangely 10-year fund really means 12-year funds). So it is unsurprising that an over-funding environment and the commensurate returns hangover would have lasted until about – well – 2012

Just why does over-funding dampen returns? For starters we saw a huge influx of inexperienced managers enter the VC industry proving clearly that being a VC is not a purely quantitative job.

But on micro level, over-funding also creates performance problems for specific companies. In a rational funding environment you might see 3 or 4 great competitors slug it out over the market, each with enough funding to prove their performance until the next milestone where the market decides whether they deserve more funding. They compete on features, price and execution.

In an over-funding environment companies are encouraged to eschew revenues in a land grab to acquire eyeballs, clicks, page views or whatever other vanity metrics give VCs the false comfort that they’re sitting on a gold mine. Try charging customers for your product when you have 12 competitors giving the product away free finances by $20 million of VC.

The Exit Problem

And of course the funding problem coincided with the stock market correction that took away most exit options for years to come. IPO markets had burned an entire cycle of retail stock investors and many institutional investors to boot.

The numbers of potential buyers had decreased dramatically both because large companies were shedding jobs and because many past buyers simply lacked resources to make acquisitions. And in a market with too much capacity (too many startups) the leverage was completely in the hand of buyers at M&A activity finally picked up.

So of course returns from 2000-2010 were subpar on average for the industry.

Today’s Normalization

Fast forward to 2012 and none of these conditions hold.

While the number of startups has increased exponentially, the number of active venture capitalists has shrunk by more than 2/3rds in the past decade to less than 750 today and still shrinking. Put simply, more deals and fewer venture capitalists mean better access to deals, more stability for winners and great returns for the best in our industry.

Money flowing into our industry has also massively downsized. LP contributions to VC firms shrunk from 2000 and by 2005-2008 had stabilized to around $30 billion per year. By 2010-2011 this had shrunk by half again, averaging under $15 billion.

It’s also worth noting as data would suggest from this SVB venture funding report, lower costs to build tech & operate businesses implies the possibility of lower loss ratios in portfolios. It will take some time to prove out this hypothesis, but the data above suggests it may be the case.

So it’s hard to make a compelling argument that the performance on average in the past decade will prima facie have any predictive powers in determining the next ten. In fact, the market conditions would argue for quite the opposite, which is what makes rear-view-mirror analysis so blurred.

3. There are 20x more consumers online

In 1997, the year the Kauffman Report begins its analysis; there were 70 million users online globally. In 1998 it was 150 million, 1999 250 million and by 2000 it had crossed 350 million. Even at this staggering pace it still represented less than 6% of the world’s population.

By the end of 2011 the Internet population was estimated at 2.3 billion, with 275 million in North America alone (source: Internet World Stats) and an astounding global penetration of 33% of the world’s population. Considering how much world poverty exists this penetration rate is truly mind-boggling.

Put simply – doing business online is significantly more valuable than it has ever been. There is no sector of the economy that isn’t being transformed by the online community that is now voraciously consuming media, applications, communications and buying global products.

To ascribe past poor performance in our industry to the current market situation we face is myopic.

4. We’re online all the time and at high speed

It’s not just that more people are online, it’s that we’re online all the time.

Internet usage a decade ago was less than 1 hour per day and was restricted to narrowband communications. Today we’re online 3.1 hours per day on average, and that’s excluding the other 13 hours a day where we have our mobile devices, our connected TVs, our iPads and Kindles and soon our cars connected to the web.

The ability to interact, transact and disrupt is an order of magnitude greater at broadband speeds than at 56k dial-up modem speeds. Just how transformative is broadband? As of January 2012 consumers were watching 4 BILLION video views per day on YouTube. A decade ago the idea of even watching video online would have been laughable.

THAT is disruption. And as the recent VC fundings of Maker Studios, Machinima, Movie Clips, Big Frame and Fullscreen will attest – opportunities for massive growth in our sector are anything but moribund. The video industry will be disrupted just as books, newspapers and music before it.

And retail, financial services, hotels, the auto industry, taxis, flowers and every inefficient or protected industry out there is being altered by technology changes that change market dynamics and create opportunities for the innovative, the nimble and the risk takers.

5. Mobility really changes everything

It’s not just that we’re connected to the Internet at higher speeds and for longer; we’re actually always tethered to the web. In fact, the majority of Americans are now carrying computers in their front pockets.

The opportunity to transact at the point of purchase increases the sheer number of revenue opportunities. This world of local meets retail meets digital advertising portends to technology disruption and with it VC opportunities.

This never existed a decade ago. Heck, this opportunity didn’t exist three years ago.

According to Google data 30% of all restaurant searches now come via mobile devices. Our societal behavior is now to look up things we want to book or purchase at the point & time of need.

The desktop web introduced banner ads that offered “brand advertising” opportunities akin to television. Mobile devices deliver “bottom of funnel” sales opportunities that deliver real & immediate economic results.

Search for a restaurant, book a table, eat in 30 minutes. Search for movies times, book your tickets, see a show. Bottom of the sales funnel.

The mobile world brings enormous business opportunities and changes to business models that were unthinkable when VCs made investments ten years ago that produced the last decade of results.

And the future?

Nearly 25% of US users access the web primarily through only mobile devices and these are our youth and thus our future. It is estimated that more than 30% of all YouTube videos are now being consumed on mobile devices and I’ve seen actual data that shows in some youth genres mobile video consumption now exceeds 50% of video views.

When you look at the developing world this is the majority of users (due to lack of landline infrastructure) and it portends future opportunities in payments, entertainment, application development and services.

This doesn’t seem like the end of VC to me, it feels more like the 2^nd inning.

6. Everybody is now payment ready

Often overlooked in the importance of what has changed during the past decade is that we’re all payment ready now. We’re all one-click away from buying, watching, renting or ordering just about anything.

When you order an Amazon Kindle it comes pre-configured with your user name already configured into the device so that you can click a single button and buy shit. And buy people are doing en masse. It’s not a tablet – it’s an order entry device!

A decade ago most of the country was fearful of entering their credit cards or using mobile banking. Today all of our banking and payment information is accessible online and we are one-click from buying from Amazon, iTunes, the AppStore and PayPal.

Businesses are also one-click from advertising through Google and now Facebook. Web businesses can now grow revenue before they can even afford sales people.

This trend is often overlooked yet the results or palpable. When businesses really work – they explode financially at a pace that we haven’t seen in history and with limited investments to prove out this case.

If you think back to just the past couple of years we’ve seen enormous growth on limited capital in businesses like Words With Friends and OMGPop (both now Zynga) as well as Angry Birds.

This has spawned growth in related VC-backed businesses like Burstly, TapJoy and Flurry who help enable real-time transactions in mobile apps.

The whole ecosystem grows rapidly because the distance between, “I like this application” and “give me an upgrade” is one click with none of the traditional abandonment that comes with having to pull out your credit card.

Consider this: 5 years ago VCs were debating whether US consumers would ever adopt “virtual goods” in the way that Asian consumers did and thus saw the popular rise of QQ (TenCent) in China (which did $5 billion in revenue in the past 12 months).

Virtual goods are in fact booming on a global basis and in many instances deliver a much higher ARPU than advertising revenue. 2012 virtual good revenue is expected to top $12 billion this year. [thank you to Kidlandia for the chart]

And here’s the thing – 55% of the entire market of purchasers are 15 years old or younger. There is no stronger evidence of the power of one-click purchasing (as these people clearly don’t have credit cards).

Imagine how these consumers look in 10 years time. Will they really even understand cash? Unimaginable to you? Just remember that 10 years ago you had no: YouTube, Facebook, iPhone or iPad. In fact, you were cool because you had a Palm Pilot while your friends still used a Filofax (yes, you know I’m on to you).

7. We’re all socially linked

And finally it can’t be ignored that we’re not only payment ready, but we’re socially connected. Look at the rapid adoption of Groupon, LivingSocial or Instagram as proof of how rapidly businesses can grow through viral means.

It’s not just that businesses can monetize more easily, when people like products or services they are diffused more rapidly through the population than has ever been the case.

Nowhere was this more evident than the rise of Zynga, one of the fastest growing companies in history. But this is also spreading through non-game types of businesses.

Evidence Fab: Just 18 months ago they started selling products and through a unique offering and a flawlessly executed social model they are reportedly on par to cross $100 million in sales in 2012.

That type of growth on limited VC dollars was unthinkable a decade ago.

Morning in VC

These seven factors are leading to better and more sustainable opportunities in venture capital than have been present at any time in our investment histories.

We have lower costs to create companies – leading to more early stage innovation. We have a more normalized venture market with less capital and fewer firms. We have consumers who are online at higher speeds and for more of their days. People are connected all the time and when they’re mobile. Each of these pocket computers is payment ready & social linked.

Given these seven factors – it’s hard to look in the rear view mirror and imagine you can see the future.

I believe it’s truly morning in the technology sector. And I remain convinced this bodes well for our venture capital industry.

Top image courtesy of Fotolia.com

I recently spoke at the Blue Glass conference on the topic of marketing.

I’ll write up some thoughts in a blog post format soon. I’ve been spending time looking at marketing conversion metrics at portfolio companies lately. We’ve been testing things like:

• How do Facebook “Likes” perform relative to FB ads that drive you directly to a web page
• How do brand pages convert relative to the Timeline
• How do integrated Twitter campaigns work relative to “promoted Tweets”?
• How well do YouTube ad campaigns work? (hint: remove Bit.ly links and they convert much better. I don’t know why … it just is – or so the data I’ve seen has shown)
• How well do “sponsored stories” work? Are they authentic enough?
• Can you do brand integration on YouTube? (hint: yes, it is performing off the charts well. crazy well.)
• Do vanity metrics matter? (likes, fans, clicks) … (hint: use awe.sm – I’m an investor along with Foundry Group. But I promise the data will show you how well you convert versus tracking just clicks).
• Do celebrity endorsements work?

I talked about these topics in this presentation. Hopefully you can get a sense from the PPT. Hopefully I will teach myself Keynote soon and give up PPT. Hopefully I’ll remember that my high school teacher told me not to use the word “hopefully” this way but it still sounds better than her suggestion, “It is hoped.”

Anyway, if you want me to cover one topic before another feel free to drop me suggestions in the comments. I’ll try to pick up on some of these themes over the coming month or two.

Here’s the deck on DocStoc
Final BlueGlass _April 2012_

It’s Wednesday late afternoon. I’m aboard Delta flight 1833 from Cincinnati (actually, Northern Kentucky for what it’s worth) to Los Angeles.

I had a very enjoyable day in Cincinnati meeting many local entrepreneurs, angels and accelerators. I was here to see one of our LPs (limited partners are the people who invest money in VC funds) called Fort Washington. They’ve been a long-term investor in our fund – GRP Partners – and it was important to me to spend time with them in their home market and meet the people with whom they deal locally.

We had lunch at a restaurant that sits atop the old Riverfront Stadium where the Cincinnati Reds played ball when I was a kid and the site where Pete Rose broke the record for lifetime hits. I felt nostalgic. They have a marker where first base was and where Pete Rose hit his record-breaking 4,192nd hit. If I wasn’t on a flight I would post the pic I took but when I land I’ll put it on Instagram.

I met with Dave Knox whom I had previously met when he worked at P&G in marketing. He is now involved with an acceleraotor called Brandery in Cincinnati who focuses on helping local startups get off the ground and figure out how to get access to the huge brand dollars unlocked by working with big ad agencies and with brands directly.

I met with local seed fund investors like Mike Venerable who is the MD of CincyTech (a local seed stage fund), Tony Shipley who is a director of Queen City Angels as well as some local entrepreneurs including Blake Shipley of CoupSmart and Sameer Mungur of ZipScene.

It’s easy to discount Cincy – it’s a “flyover state.” And those in CA and NY are quick to dismiss that which doesn’t feel like home. But I found resonance in meeting the local investors and startups. They spoke of a need to prove out revenues in order to raise capital and a stark contrast to many Silicon Valley firms whose goal is user numbers over revenues. In that sense it felt very LA.

And when I heard them speak of how they organize as angels (pools of capital – up to $2m per deal) and accelerators (direct access to large Fortune 100 companies) I must admit it sounded as sophisticated as what we’re trying to achieve in LA.

Already this week I’ve been in Dallas, Austin, Houston, Dayton and as I mentioned Cincinnati. It’s Wedneday. I have a full calendar in LA Thurs/Friday and then I spend Tues-Friday of next week in the Bay Area.

I mention this for a reason.

In the age of Skype, email, cheap telephony and collaboration tools it’s all too easy to sit in your office and connect with people remotely. It’s even easy to justify it to yourself, “it’s such a productivity drain to spend time on the road and I can accomplish everything I need using modern tools.”

Yeah, that’s tempting.

I hate travel, too. I have two little boys and a wife I adore. I hate being away from them. I hate crappy hotels. I hate flying. I detest airports. I’m sick of rental cars. I eat out too much. I’m sleep deprived. My ride picked me up this morning at 3.30am California time. I have bags under my eyes (or so everybody always tells me).

Still. You can’t make any impact in business without shaking hands and kissing babies. You need to be out amongst people. You need to press the flesh. On the first level it’s how you learn. It’s how you avoid your local echo chamber. It’s how you gain customer insights. All of that matters.

But the deeper point is that all business is built upon human relationships. I’ve built my career by 20+ years of looking people in the eyes, making promises and then delivering against what I said I would do. You don’t build trust, friendship and human bonds on Skype.

The interesting thing about pressing the flesh is that once you’ve broken bread with people and spent personal time getting to know them it is then much easier to build long-term relationships through email, phone, Twitter, Skype and the like. There is a certain trust that exists and a certain leeway granted to you since they really “know you.” I believe in the Blink perspective where we as humans are really programmed to know whether to trust people by the short amounts of time we spend in person with them.

But you can’t meet once and have infinite chemistry. Time weakens bonds in the way that your high school friends whom you haven’t seen in years seem like distant friends until you reconnect in person and remember why it was you were so tight in the first place (or not).

Relationships have elasticity. They stretch over time and you need to replenish their strength. You do need to travel. You do need to rekindle bonds. You need to look into eyes.

You need to shake hands and kiss babies. It’s part of being a leader.

Why am I going off on this tangent?

I was in Houston on Monday night. I was spending the evening eating room service so that I could meet with a potential investor for my fund the next morning. We’re a couple of months away from closing our 4th fund as has already been reported in the press.

I could have easily done a phone call. Or a Skype. Or relied upon the fact that he had already met my three partners. But he was very important to me. I wanted to meet in person.

And as I was out of town it was a great chance to attempt to get caught up on email. I received a note from a friend who was raising a seed round. He asked me for an intro to an investor friend of mine. I wrote to my friend asking if the intro was OK. He said yes.

So I did the intro.

The founder whom I intro’d wrote in the email to the investor, “let me know if you’d like to set up a phone call or we could meet in person.”

I was bcc’d.

I wrote back to the founder (in private), “no fucking way. There’s no chance you’re doing a phone call. You asked me for an introduction. I was happy to do so because I believe in you. Now get your ass on the road and go meet them in person. Don’t give them an easy out to do it as a quick call.”

I know the potential seed investor wasn’t bothered by a call. In fact, it’s probably easier. You commit less time and feel less obligated – most people hate to make other people travel. It makes you feel obligated.

But a phone call for a first meeting is SO under optimized. You MUST be there in person. It’s a cost of doing business. It’s a learning process. It’s how you build long-term relationships.

You need to shake hands and kiss babies.

Yes, there is inefficiency to physical travel. Get over it or keep your day job. Plan your travel and see multiple people and companies while you’re there.

“But, Mark, the [investor, biz dev parter, customer, M&A buyer] told me a telephone call would be fine for the first meeting!”

OF COURSE! They don’t want to feel obligated. If they feel they put you out then they feel they owe you something. Of course they don’t. They shouldn’t. But it’s human nature. We’re reciprocity machines.

So I never make travel a big deal. Of course I’ll be in Austin next week. I need to be there anyways. I travel there regularly. Not a problem. Hey, I already need to go to Dallas anyways so it’s no skin off my nose to come see you.

I went even further when I was an entrepreneur. If I had really important clients I would call them and say, “I need to be in Chicago in 4 weeks. Which date that week would be best for you?”

Of course I needed to be in Chicago to meet THEM but I didn’t word it that way. If they couldn’t do that week then I would change my trip to the following week.

Ok, so this is starting to feel like a rant. I don’t mean it that way. I mean this as a soft kick in the arse not to take the easy route. Not to be lazy. Not to succumb to the false argument that Skype is good enough (it is, of course, once you have a relationship).

So get out there. Stare people in the eyeballs. Make commitments that you know you will keep. Shake hands. Press flesh. Kiss babies. Find out how local markets differ from yours. Win over customers. Raise cash more easily.

And stop buying into conventional wisdom. It’s true that distance has collapsed. But it’s also true that humans are programmed to judge other people by being able to meet them directly.

I promise it will be enriching to your experiences.

And remember – “Business travel is sexy. To those who never do it.” For the rest of us, it’s a necessary process to become successful.

When you work inside a startup with lots of clever and motivated staff you’re never short of good ideas that you can implement.

It’s tempting to take on new projects, new features, new geographies, new speaking opportunities, whatever. Each one incrementally sounds like a good idea, yet collectively they end up punishing undisciplined teams. I like to counsel that the best teams are often defined by what they choose not to do.

Let me explain.

As a VC I regularly meet with companies and listen to their plans. It’s a very common occurrence that a young startup with sub 20 staff and sub $2m in financing is racing around doing too many things. This level of complexity always worries me. A significant number of the companies I meet with get some form of feedback from me that:

“I’m a bit worried that you’re doing too many THINGS. You run the risk of being a mile wide and an inch deep. It’s hard enough to do X really well and succeed. I’m not sure how you do all these other things and yet I think they may end up being a distraction to X.”

I already know your response. Trust me. I hear it every week

“Yeah, but I’m just going to execute this [channel sales deal, international license of my product, new industry, new operating system, biz dev deal] and then it will pretty much run itself.”

It never does. That channel deal that you thought would take no times ends up burning scarce calories. The 3rd-party tries to sell your software – they just need your help with tech assistance to close the deal. They just need you to update your marketing materials. They got your last version working but since your latest release they couldn’t get it to work. That test you did on launching a RIM version of your product – it was only beta – now has 20 users who need a patch because it’s not working properly.

Every extra set of features that you added that served one narrow use case end up being features you need to support in future releases adding complexity to future development, usability testing, regression testing, etc.

Every team I fund comes across as laser focused on their core mission.

My advice?

I always tell teams I meet with, “The scarcest resource in your company is management bandwidth. Spend it wisely.”

Every company is built by a team and every team member matters. But as you know, a few key people in any business have disproportionate impact on the company’s ultimate success. And nobody is more important in this regard than senior management. These people need need to be hyper focused on those things that matter the most to the company’s success. It’s why I don’t invest in Conference Ho’s.

Examples from discussions I’ve had this month that might resonate with your internal debates about how to prioritize

• We are giving a version of our product to a team in Europe who will start selling our product internationally
• We are signing up a channel partner to sell our product since we haven’t scaled our internal telesales team yet [yes, we know that they don’t have experience selling IT, but they have customer relationships]
• We’re going to put a guy on the ground in the UK to address early leads we’re getting from ad agencies there [true, we haven’t thought about employment laws, taxation, currency management, etc.]
• I know our product seems complex but we felt we needed to test lots of features to be sure we knew what would resonate with users … or … we aren’t committed to features x, y, z yet but we know our competitors are planning to so we wanted to be first to market
• We need to hire a team in financial services now to address the needs of that industry [yeah, I know we don’t yet have big customers there. ok, I know our product isn’t yet verticalized. still, we need to start now or we’ll be behind.]

And so on. Trust me – each additional complexity you add before you’re ready decreases your probability of being truly excellent at the things you want to do extraordinarily well.

Instagram didn’t rush to Android. They also didn’t do video. They were truly excellent at what they did do.

What do you want to excel at? How will today’s “toe in the water” initiatives distract you or take your management’s time or attention off of your core business? How likely is your, “won’t take too much time” initiative to come back and bite you in the butt?

Beware. The best teams are hyper focused.

Image courtesy of Fotolia

** A note to readers. Sorry if you received an email with a draft version of this post. I had some problems with my hosting company. They were testing out what the problem was and accidentally hit publish on a draft post.