Wednesday, August 8, 2007

Do you see a VC?

posted by Andy Leff
Heard this story before? Smart person gets idea for new widget. Person ropes in one or two other smart people. The smart team perfects amazing widget in garage on shoestring budget.

Then team starts free blog about widget. Other smart people take notice, and become widget devotees. News spreads. Widget sales soar. Original smart team retires obscenely rich.

This scenario, of course, is every Web 2.0 entrepreneur's dream. But it can also be a venture capitalist's nightmare, according to Fred Wilson writing in Social Computing Magazine.

Why? Because business development that used to require $20 million can now take as little as $60k to achieve the same results, thanks to cheaper, faster, and easier Web services and capabilities.

So what's a VC to do when business owners can run the show themselves? Wilson's answer: Wait for stage two of their growth. Sure, startup costs might be covered by cheap Web apps and free blog PR, but success leads to expansion.

And that means more staff, more customer service, more infrastructure, more advertising -- and a need for more capital. Wilson sums up the VC opportunity here:

"Venture capital still plays an important role in financing web entrepreneurs. But the need for capital comes later in the company formation process. And that is a very good thing for everyone involved. Because VCs can scale their capital (i.e. risk) exposure as the risk is mitigated from the opportunity. They can still get their $10mm per deal invested, but they will put less up at the start and more up later."

On the flip side, business owners should factor expansion into their long-term business strategy, and consider VC funding for future rounds.

Hopeless entrepreneurial romantics need not fear; calling on VCs won't damage the company's original Cinderella story. Rather, it ensures the company has a reasonable chance for success at a point when DIY techniques can no longer sustain the growing enterprise.

Don't get me wrong, companies' original spirit and customer interaction should remain intact with blogs, forums, and a strong Web presence. But later-stage VC can give Web 2.0 widget-makers a leg-up in a competitive space, and grease the wheels for the next round of invention.

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