As a chronic early-stage software entrepreneur, once in a while I read something that I want to share with others similarly afflicted. In a WSJ article titled ‘VC’s New Math: Does Less = More?‘ the author writes about VCs who really get it. The future of early stage capital is moving in the entrepreneurs’ favor. Change is constant, even for the money folks!
The take away here for someone either considering starting a software company is that, in my opinion, times have never been better. Why do I say this? How can I say this? Oil is approaching $100 barrel and the housing industry is taking us into recession! Why, I must be mad!
The Good News About The Economy, for Startups at Least
Why are things so good for software startups? Given you have a team with talent and an idea, there are two major problems you face; getting something built ‘in time’ and getting it into distribution.
The term ‘in time’ means getting a beta done before your landlord kicks you out, before your squeeze ditches you, etc all the bad things that happen when funds dry up. The answer here is productivity and I can say this from experience; the time it takes to develop a software product with modern development tools has been radically reduced. Both Open Source and Dot Net development tools are amazing even when compared with tools 5 years ago. So the point here is that you can do so much more in less time. And that takes less money.
The ‘distribution’ monkey is no longer the hideous rodent it once was, if you pick your battles correctly. Of course I am referring to the Internet as my channel of choice. When compared with the other models – outbound calling, direct sales force, fighting for retail shelf space – the Internet is a huge breath of fresh air. Oh, that plus worldwide direct to the end user access! Of course many software business models aren’t suited to Internet distribution. My advice here; change something in what you are doing so that you sell, install, support… over the net. You’ll be glad you did.
Bottom line is that software startups that use modern toolsets and distribution over the net need significantly less venture dollars to get going. The VCs in this article get this. But it’s hard for a traditional VC firm to do this. In a post about the same WSJ article, consultant Alan Patrick discusses specifically how this change in the VC landscape is changing the dynamics of power between funders and founders. His post is an interesting read as well.
If you look at the amount of dollars VCs control, the number of partners (and therefore deals) they can play in, and the returns they need - this is a major problem. It is not unusual for a fund to target, over time, $10M-$20M per deal. And given the expected returns, they must either lose it all or make 10 to 20 times return (as most deals fail and so the winners must be big to show an overall win).
Not that this more traditional VC model is wrong. It has served both entrepreneurs and VCs well for years. The problem is that in the highly productive world we live in, a talented small team can build and launch a cool web app for under $500K. And get traction. And get great results. It’s happening every day. The VCs mentioned in the article get this and are structuring their models around this new world.
I think this is the future and I applaud those VC firms that are agile enough to engage and prosper. But the big win is for the entrepreneur. Baby, times have never been better!
