Stirring VC Assumptions

How the Venture Capital industry is changing, and how this impacts startups.

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Is the game shifting for the top start-ups that high-end venture capital companies fund? Are they specifically considering significantly lower investments?

Last week, I went to a Web 2.0 Expo seminar on venture financing with David Hornik, who later wrote:

“Today, I was a panelist on the topic of ‘Venture Capital 2.0: Bright Future or Broken Forever.’ Mike Arrington chaired the discussion, which featured Josh Kopelman and Jeff Clavier, two of Mike’s financial industry colleagues. It was one of the bigger crowds I’ve ever addressed – I’m thinking there were over 800 people in the room. Crazy. Mike made a concerted effort to get established VCs (including me) to take on the angel investors (Josh and Jeff). His premise was that since there is so little money necessary to start a large online firm these days, angel investors would end up with all of the profits. While this isn’t an outlandish claim, I must say that I completely disagree. As I’ve previously said, although it is true that an online business need less money to get momentum, I feel that a successful internet firm requires considerable cash to expand. Despite this, the entertainment value was great (which was most likely Mike’s true goal). And we had a terrific time agreeing and disputing with each other.

“There is no little amount of money necessary to start a large online firm these days,” says the author. The concept of spending $500K to begin a business, as opposed to $2-$5 million in the past, appeared to be taken for granted by the panelists. Arrington refers to two well-known venture capital assumptions:

  1. Every transaction that a venture company invests in should have at least two other businesses engaged.

  2. Venture capital companies typically need a minimum investment of $2 million.

  3. As a result, venture capital agreements typically range from $4 to $5 million.

However, August Capital’s Hornik and Benchmark Capital’s Michael Eisenberg both stated in this session that these traditional assumptions are no longer valid; even the largest high-end venture capital firms want to spend a few hundred thousand dollars in the right business.

What’s the best option? My hunch is that it’s a “web 2.0” transaction with a management team that includes web-savvy veterans from past online start-ups. One thing that hasn’t changed is that most venture capital firms prefer to invest in companies with experienced management teams. There are exceptions, but this is the general norm.

Tim Berry —

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