A lot of people have commented on how the economy and lack of "exits" changes the game for entrepreneurs seeking funding for early stage idea.  You need one heck of a personal connection or paying customers to even think about getting funded at a decent valuation today.  The bar is higher than ever to justify an early-stage investment, and for the effort you'll get a modern (i.e. low) valuation to boot.

Rob Adams (former venture capitalist and now professor at the UT Business School) said at a recent Texchange event here in Austin that it is "easier for a startup to sell a major customer than it is to raise funding."  That's probably true, especially for companies that haven't gotten a lot of customer traction.

Then today at an Austin Technology Incubator "Lunch and Learn" event, we heard Jim Nolen and Matthew Lyons talk about term sheets and fundraising in 2009.  The news was similarly bleak for entrepreneurs seeking early stage investment to validate an idea.  Venture capital returns for the decade ending in 2009 look OK, but not nearly as good for the decade ending in 2010.  VCs are having a hard time raising new funds, and they're keeping dry powder for portfolio businesses that were hot years ago but may have actually missed their opportunity to shine.  Even angel investors are seeking safe investments — investors everywhere are reluctant to part with any money without a reasonable assurance they're going to get it back at decent returns.  There isn't much appetite for risk today — too many people have been burned in the past and there isn't obvious reward lurking around the corner.

So where does this leave us?

• Low M&A and IPO activity
• Stock market drop has eradicated some angel investor wealth, anxieties remain
• Venture capital undergoing transformation & reinvention

Yet, startups continue to innovate.  New technologies have dotted the landscape and have created new opportunities for entrepreneurs to create value.  Perhaps most importantly, costs of doing business have decreased dramatically between the recession and efficient Web 2.0 technologies that dramatically reduce some operating costs.  So it takes less money to create more value today, but investors are still skiddish.  It tells me that there is a market inefficiency in favor of the statup entrepreneurs right now — as long as he/she can continue to build value and minimize investment.

From my vantage point, all of this indicates the emergence of a rarely discussed trend:  a temporary shift of power to the bootstrapping entrepreneur.  How does a startup executive pull this off?

• Commitment to a capital efficient model — low burn rate with obsession over costs and as little outflow in salary as possible,
• Inclusive and fair distribution of equity — options or other benefits for employees who contribute despite receiving lower than market salary,
• Extreme scrutiny of service providers — reluctance to make large financial commitments or promises before the startup is ready,
• Surgical marketing/business development strategy -targeting of prospective customers or partners through personal engagement and 1:1 outreach,
• Little/no "buzz" before proving the business model -no significant PR, blogger, or press outreach announcing your great idea until it has been refined.

By going this route, an entrepreneur can build a business the old-fashioned way, by building value one customer at a time… and by translating feedback into product innovations that will drive success.  It's better to give yourself time to iterate a bit before going loud.  Once the company has achieved its first major success, it's time to set everything in motion — marketing, PR, fundraising, etc.

As entrepreneurs, we are all driven a little by wanting to bring a new idea to the world.  We get excited and our reaction is to tell the world about it well before we've really figured it out.  If you aren't patient, you can look silly when your specific iteration isn't exactly right.  But if you can be patient, you'll give yourself precious time to figure out where you fit in and what specific value you provide.  Then you can tell the world what you've achieved knowing that you've helped to solve real problems in the marketplace.