Today’s International Herald Tribune carries an article by Miguel Helft about how “Tech start-ups snub the big money as venture firms adapt”. He describes how the new Web 2.0 type players need nimble capital in small doses and are more likely to turn to angel investors than to traditional VCs. This notion that the VC business model is broken in the Web 2.0 world is doing the rounds lately. My view is that the model is not broken but things are shifting. What’s happening is that the lifetime capital needs of all startups are shrinking. There are two main forces at work. One is that most startups don’t need to buy costly software or data center infrastructure; they can merely rent it, say, from Amazon (Jeff Bezos talks of Amazon’s S3 and EC2 services in his recent BusinessWeek interview). The second big driver is R&D globalization. Capital intensity to get to a product is coming down dramatically. It used to take $40-60m to get a complex hardware product done; it can now be done in half the money. The same is true for complex software products. The bottom-line is that we are living through a period of dramatic improvements in capital efficiency.
While this capital efficiency revolution is pushing some consumer startups, notably Web 2.0 based, into the hands of angel investors, it is also bringing more opportunities into the VC sweet-spot. Take enterprise appliances as an example. They can now be developed in the $10-20m range. This opens up new markets and new opportunities for VCs. There are enough capital intensive opportunities for VCs to go around as Simeon Simeonov argues in his thoughtful post. So the way I see it, the VC business model is not broken, it only needs an adjustment as to where it is applied. It’s a change for the VC industry, but it’s not an orbit change!
This blog is a good effort. The issue is one that needs a lot of discussion and debate. More power to this! Good work, Sharad for initiating this discussion.
Sanjay Anandaram
Hi Sharad,
Very interesting post. One thing that has also substantially changed the way startups function is – open source software. I think there are a number of open source components available for the LAMP stack, which makes software development much faster and cheaper. So, I believe, there are 3 forces – 1. lesser capital requirement due to cheaper hardware, 2. Globalization of software development and 3. Open source software development mode.
Thanks,
Mukul.
http://mukulblog.blogspot.com/
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