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Venture Capital - Thursday, November 9, 2006

NY Times Fears For VCs

The New York Times' Miguel Helft (ex Industry Standard and San Jose Mercury) continues the dream-beat story that venture capital is in trouble and needs to be re-invented due to the falling prices of launching a company. The story is hung around Meebo, which was started with a few thousand dollars put on credit cards, plus $100K from angels once Meebo hit a growth spurt and later yet about $3.5M from Sequoia Capital. Actually, maybe that wasn't a good example as they did raise VC funding.

Said one Meebo founder: "We had a bunch of V.C.'s talking to us about potentially putting more money in. We said no. A lot of things happen when you raise a V.C. round, and they really slow you down."

"V.C.'s hate it; they want you to take big money," said Jay Adelson, CEO of Digg and Revision3. "Digg took some venture money, but far less than backers offered, and Revision3 has been running on about $850,000 raised from a group of angel investors."

"Several venture firms are seeking to adapt. Just last week, Charles River Ventures announced it would offer loans of $250,000 to entrepreneurs as a way to gain access to promising start-ups. Other firms are also giving out small loans, albeit not as a part of any formal program."

"For its part, Mohr Davidow Ventures has increased the number of "seed" investments — small sums given to embryonic companies — to about 10 a year from 5. And Union Square Ventures, which was formed in 2003, has made nearly half of its investments at $1 million or less, a departure from its initial plan to make first-round bets of $1M to $3M."

"I think there is in the V.C. community a sense that the rules have changed or are changing," said John Battelle.

No doubt about it, it is possible for an ad-supported publishers, a social network or Web application to launch today on credit cards. But these represent a fraction of the companies that VCs are funding.The problem with this article is that it gives the impression that VC activity is centered on Web 2.0 companies, when in fact Web 2.0 deals are a fraction of VC investment. Outside Web 2.0, the costs of launching a start-up have not collapsed. Just look at the deals in the works today alone:

Brightcove is looking to raise $55M. That's a lot of money, but Brightcove could not keep pace without it. Brightcove has 20 job openings, in their 4 offices and they probably have 200-300 expensive employees to keep in shoes. Moreover, while some costs have gone down, video serving remains terribly expensive. Brightcove is playing for huge stakes and should afford to waste some dollars to grow more quickly than revenues.

Over in Norway, Norsun raised $23M. You are going to tell us that entrepreneurs are going to build a solar panel assembly plant by putting a few thousand dollars on their credit cards.

Then there's BlackArrow which raised $14.75M today for its video ad serving technology. We can imagine some kids out of a college developing a video ad server and putting it on the Internet. But BlackArrow needs to hire some expensive BD, sales and sales engineers to knock on the doors at ad agencies CBS, CNN and elsewhere and they need to convince people there that BlackArrow will be in business in 5 years.

Read -For start-ups, Web success on the cheap (NY Times)