Sunday, October 7, 2007

The $100K Startup? Changes in VC Land?

I've been reading or hearing quite a bit about how startups these days don't take nearly as much capital to create as they used to. What used to cost $1M now takes $100K. If that's actually true, then it creates New Rules Of Technology VC. In this post RWW talks about some of the new kind of approaches to funding:
  • Y Combinator is creating tech companies with a tiny (10-20K) seed investment;
  • Charles River Ventures started a Quick start program;
  • Jeff Clavier launched a 12M fund for tech startups.
Each of these is aimed at effectively providing earlier, smaller financing rounds.

I don't really agree that $100K is the new $1M. Sure, there are some fun things you can create quickly on platforms like Facebook that may get viral uptake. And there will be examples of start-ups that didn't cost much (although $100K is pretty extreme and certainly doesn't count human effort costs). However, my belief is that while certain aspects of technology development have come down in cost and it's easy to build small applications quickly, as the scope of the effort increases, costs do. Just as they always have. Further, while some viral pick-up or online marketing is possible in certain startups, if anything, marketing and sales has become harder because of fragmented attention.

At the same time, I tend to agree that there's a need for smaller financing rounds for very early stage companies that lines up with what RWW is talking about. Angel networks act like low-end VCs and expect a company with a product and a somewhat proven market opportunity. Where does a start-up go for $150K - $300K to prove that out. Hopefully, they know some Angels personally. These alternate sources of funding may address this very common need.

My guess is that a new round of incubators (The Hive) may result or new angel networks (that act more like Angels) or possibly the VC acting like Angel model. However, since this gap has existed for a while, do we really expect this to change that much?

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