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Is Venture Capital Dead?

August 17th, 2010 · No Comments · Financing

Big Ideas:

  • Internet start ups require less financing.

  • Angel investors are encroaching on venture capitalists.

With open source software and inexpensive technology, the start up costs for Internet businesses are much lower than in the past. Lower investment requirements, combined with an increase in angel investment are often making large scale venture capital funding unnecessary.

Jason Cohen of A Smart Bear writes;

VCs are increasingly unnecessary to get companies started, both because of inexpensive technology and marketing channels and because there are enough angel investors that founders don’t have to sell the entire farm for ridiculous amounts of cash they don’t really need.

And then, for the few companies that really do need VC-sized investments to take them from product/market fit to explosive growth, by the time they start touring Sand Hill Road their valuations are sky-high; they’ve already got all the trappings of a successful company, the major risks having been removed during the angel round.

Michael Arrington on TechCrunch concurs;

An entire generation of entrepreneurs have stopped thinking about hitting up those top tier VCs as their first step in the startup process. Many now simply begin with Y Combinator, or take a small angel round. These angels are fast and nimble and they are hanging out with the entrepreneurs at events, incubators, etc. They are in the fray, while many of the old VCs remain above it all, waiting for the entrepreneurs to come to them, hat in hand.

With start up incubators like Y Combinator and TechStars proving that substantial companies can be built with as little as $25,000 and a few months, perhaps venture capitalists are on their last legs?

Arrington goes on to say;

The VCs, for their part, fight back more quietly. They point out that very few angel funded startups end up very big or interesting. “An entire generation of entrepreneurs are building dipshit companies and hoping that they sell to Google for $25 million,” lamented a venture capitalist to me recently. He believes that angel investors are pushing entrepreneurs to think small, and avoid the home run swings. And you don’t get a home run unless you swing hard, he says. When you play it safe you nearly always lose.

Is a $25 million sell out a ‘dipshit company?’ More importantly is VC investment really necessary for ‘home runs?’ While getting a few million dollars in funding is the holy grail for many entrepreneurs, I tend to believe that a good management team, with the right mentors and angel investors can deliver more positive value to society than financially focused venture capitalists. I hope there are a lot of ‘dipshit companies’ focused on creating value for customers rather than returns for venture capitalists.

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