Funding the Web 2.0 gravy train

The Dead 2.0 blog has an excellent post on the current state of the venture funding environment for consumer facing web services.

This part sort of sums it up:

So let’s circle the wagon back to where we started.  There’s a lot of folks out there with nifty ideas. Most of them will fail (due to viability, leadership, market positioning, bad weather, etc).  There’s a few folks out there who have a lot of money that they must invest sooner or later.  There’s a lot of momentum, hype, and energy going into an area that the decision-makers generically as a whole do not seem to fully understand. And how could they?  It’s too much, too fast.

My only beef is he took my line about mashing up RSS feeds which was about the opportunity to create more transparency on Wall Street and applied it to consumer facing web services. Oh well, everyone is entitled to take a quote out of context if it helps make a point.

Anway, it's a good post with lot's of references/links in it. Give it a read.

Comments

[Peter Cranstone]

IMHO you have to look a little deeper. What problem for "whom" does Web 2.0 solve. When you've figured that out you have to immediately ask one more question... can you make measurable, sustainable, profitable revenue from volume. In 99% of the cases the answer is NO... therefore you must iterate the process again until the answer is YES.

Finally - when you've got two YES's you should take one more pass and establish if what you are solving is "Core or Context"... i.e. is this a must have for the customer or a nice to have. If it's a must have you can accelerate, if it's a nice to have, the process of going to market is going to require more energy (re: money)

Peter

[al from chicago]

The issue I keep coming back to is efficiency of capital. The right team can get something built and launched in web 2.0 with 3-5 guys and probably 6 months -- that is not a VC investment, but closer to 300-500K angel deal. And a savvy entrepreneur should be able to fund it out of other projects or something else. And let's say this initial launch works -- even when you think about scaling up the business (and Fred I am thinking of my own situation) - say you want to launch in Chinese, Japanese, French, German asap, want to fast forward on a slew of features -- it's stil hard for me to get where the need for LARGE amounts of capital comes in. Say a typical company with 5 guys gets excited about their intial results -- even if they choose to staff up 5-7 more, you're still only talking about an incremental burn rate of $70K a month -- and since these are mostly ad supported theoretically it will be less than that. So in my mind, that second need for capital is still very very low, between $500K - $1MM. I know some VC funds like yours and others are writing much smaller checks these days on occassion -- but when you raise too much money you start spending too much money -- and I just don't know what you'd do with $5MM for most of these businesses (consistent with my last post on Arianna's reported raise at Huffington Post).

It strikes me that an entrepreneur can launch with so little capital that they should be able to continually tune their business and see how much they need -- and they really should not be taking these large large sums for the most part.

[Dan Malven]

Al (and Fred):

What this dialog makes me think of is whether existing companies will become funders of web 2.0 startups as new internal skunk-works efforts. As we've all seen, it doesn't take much capital and you can pretty quickly see whether traction is being made, so forward thinking companies can incubate new ideas themselves.

Google may be ahead of this curve by offering "founders awards" of something like $10mm cash to employees who come up with innovative new services. The reason is they don't want to encourage employees to leave to start companies that Google will eventually buy (and the founders would net ~ $10mm or so). So they are just incenting employees with $10mm paydays if they do it inside of Google.

I've seen a couple more situations like this recently. One where the company is going to do it internally, another where the company decided to not fund it and the employees left and are doing it on their own.

Spinning out these internally funded startups could become fertile ground for VCs to put capital to work. Most of these efforts worthy of spinning out would likely be profitable already, or close to it, but VCs capital would be needed to buy out the stake of the parent.

I'd be interested to know if anybody else has seen many situations like this, that either worked or didn't work???

[Skeptic]

Thanks for the link, Fred. I didn't actually intend to take you out of context, it looks like I misinterpreted the post. Which makes sense in retrospect, as I didn't quite see you having that kind of a perspective (which I alluded to as well). Anyhow, appreciate the (mostly) kind words!

[jackson]

"too much too fast"

Hmmm, I've heard that before. Oh yeah, it was me.