At the SXSW Interactive festival, I had the chance to sit down with Guy Kawasaki and talk one-on-one about startups, the new VC environment, and his new website Alltop. Guy and I first met at Apple’s first Worldwide Developer Conference in San Jose in (I think) 1987 when he had just left the position of Evangelist at Apple, and started 4th Dimension. In this first part we talked about startups and VC’s. Guy was an Apple Fellow, has written several books including The Art of the Start, and is a Managing Director of Garage Technology Ventures.

Do you think that first mover advantage is a valid concept in today’s marketplace?
It’s so much cheaper to start many kinds of companies these days. Previously, the first mover had the advantage of getting the venture capital that was going into the space and chilling the market because they’ve become the gorilla, it’s that’s just not true anymore. With YouTube there were probably 20 startups with similar ideas. Who would have bet on YouTube versus anything else, but that’s the VC’s problem. I would rather be first to scale than first to move. You could build a case that a fast second is better than a first mover. When I worked for Apple we had a fast second, which was Microsoft. So I learned that lesson. It comes full circle with the iTouch and iPhone, which certainly weren’t the first movers. Google was probably the 10th search engine to the market. Facebook wasn’t the first mover either.

How does Garage deal with the lower capital requirements for startup companies today?
Today people can take $50K of capital to start, and they prototype and launch. The good news is that we get to pick from companies that are somewhat proven. It’s not a prototype, it’s actually working, and maybe there are 100,000 users that have validated the concept. The bad news is that now the valuation is $2.5M, so a $500K investment buys less equity. Years ago you would put in $2.5M on a valuation of $5M, so the economics have really changed. I would love to have a $500M fund, because the management fees would be great. If you were only going to fund early stage software or social media companies at $500,000, even reserving a couple million for each one, that’s a lot of investments. And it’s not that easy to find good companies to invest in. When we find one, the good news is that we found it, but the bad news is that I’m on another board. A typical VC squeezes the trigger 1-2 times per year, so the numbers just don’t add up. I love the YCombinator theory where you throw around $25,000 and you see what sticks. I could almost build the case that you should shut your brain off. As I look back on these big winners, I would have never invested in them. I would have never invested in Google as the 10th search engine. I would have never invested in eBay, a company that sells used printers online.

You’re talking about a venture paradox, where by definition the 100x return idea would be really out there and not worth investing in?
I’ll tell you exactly what it would be. It would be an unproven team of computer science majors from UT, with an unproven technology and an unproven business model. But that is completely contrary to what every VC wants. Which is why you should just shut your eyes and just throw the dart, right?

What is the west coast opinion of Austin emerging technology companies? Does geography matter? Will west coast VC’s invest in Austin-based companies?
Geography is important if you’re beyond the Rockies. There’s a direct flight from San Jose to Austin and back, although these guys have private planes so it doesn’t matter. The ideal situation for a silicon valley VC to invest in an Austin company is if the company is smokin’ hot, and Austin Ventures wants to invest but the startup is hesitant to take the money. The second best case is that Austin Ventures is already going to invest, and we can just jump on the bandwagon. The third best case is where the entrepreneur says that Austin Ventures is not interested, but we’d like to pitch you anyway. We might listen if the entrepreneur is telling us that it’s not right for their portfolio because it’s not an enterprise software play. If that’s true, then that works. But now we’re getting into the dicey area. The bazaar thing is that VC’s say they like to do swashbuckling, visionary, lead the pack deals. On the other hand they’d like to know that someone else thinks so too.

In part 2 we talk about young entrepreneurs filling the CEO position, and his thoughts on Microsoft and Yahoo.

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