Two main factors drive an upsurge in entrepreneurship: cheap stuff and cheap capital. Cheap stuff is primarily a long run secular trend. Cheap capital is cyclical.

By cheap stuff I mean the inputs to a business, mainly technology. This has gone consistently down over time. One can build a website or an app for a few thousand dollars that is better than what they could have done for millions of dollars a decade ago.

Even if capital becomes scarce, cheap stuff will still be a positive factor driving entrepreneurship.

By cheap capital I mean the flood of venture capital. This is primarily cyclical. Consider this quote:

“There’s so much money chasing these deals that venture capitalists are in competition with each other. They spend their energies marketing themselves instead of screening the deals. It’s gotten silly”

Think it applies today? Or maybe to the late 1990s tech boom? This quote is from the WSJ in 1981, and referenced in this excellent article about 1980s venture capital.

During a boom its easy for most ideas to raise capital, regardless of business viability(as long as they fit with theme of the times). Indeed they can keep raising rounds in hopes of a profit decades in the future. After a bust its hard to raise capital, even for a great idea. Entrepreneurs need to bootstrap and get revenue a soon as possible.

Right now it seems there is a ton of venture capital financing companies that are losing money.

Cheap stuff and cheap capital are partly entangled. You might be reading this from within a WeWork. If they couldn’t keep raising cheap capital you think your rent is going to stay the same? Or maybe you are building a business on top of a money losing social media platform, or somehow benefiting from a thriving open source ecosystem.   On the other hand, its harder to source talent when there is a flood of capital, and certain commodity based goods can have their own production cycle.    Yet you can run your business from a garage and the new inventions of the latest venture boom aren’t going away.

Which is most important- cheap stuff or cheap capital ? I don’t know, but we’ll get to find out when this cycle turns. Creative entrepreneurs will still take advantage of technological improvements to bootstrap groundbreaking ideas, even if they can’t raise venture capital. Sometimes they do it out of choice, other times they do it out of necessity.

Once this cycle turns, we’ll go through a few years where most new businesses have no choice but to bootstrap.

This idea generally applies across all industries, not just venture funded. However in commodity based industries the cyclicality functions differently.  Cheap capital often leads to inflation in hard assets.   See also: Capital Returns: Investing Through the Capital Cycle