> In fact, Kaplan and Stromberg (2001) and Gompers and Lerner (2001) argue that
VCs are particularly successful at solving an important problem in market economies|connecting
entrepreneurs with good ideas (but no money) with investors who have money (but no ideas).
IMHO, for information technology (IT) venture capitalists (VCs), this statement about "ideas" is mostly wrong. One reason the statement is wrong is that VCs will rarely even look in any detail at an idea.
In contrast the US NSF and DoD will look very carefully at ideas, e.g., GPS, stealth, measuring the 3 K background radiation. So, will Ph.D. dissertation committees, reviewers at peer reviewed journals of original research, and more. IT VCs won't do such things.
IMHO what IT VCs look at is current traction, that is, users or revenue, and want that traction to be significant and growing rapidly. Then if nothing else is wrong -- team, competition, scalability, etc. -- an IT VC can get very interested.
So, the VCs want the idea already implemented in hard/software (usually software) and in the market and in front of users/customers.
In the world of VCs, the idea is not something from research, that could be in a peer-reviewed papers, etc. but is just a short description of what the business looks like externally to a casual observer, the common man in the street. That there could be anything from a research idea as the crucial core of the business, crucial for getting the traction, being defensible and scalable, etc., is just ignored.
So, suppose some IT founding team has the coveted traction. If they have lots of users, then the team should be able to run ads and get significant revenue. If they have lots of customers, then they should also have significant revenue.
With that revenue, there will be some serious question if the team should accept equity funding, that is, accept the terms, a Delaware C-corporation, the BoD, reporting to the BoD that can fire team members, etc. A C-corp and a BoD bring a lot of overhead.
Really, the example of the romantic match making service Plenty of Fish (PoF) starts to look more important as a example for IT startups in the future. PoF was long just one guy, two old Dell servers, revenue just from ads and the ads just from Google, and $10 million a year in revenue. As in
on about July 14, 2015, the solo founder Markus Frind sold out for $575 million.
If a solo founder has a good idea that needs mostly only software, then there is a good chance they can just write the software, bring it to market, get traction, and have revenue enough for rapid organic (that is, funded by earnings from revenue) growth.
That is, a solo founder who invented the idea can keep costs, time on communications, etc. low, write the software, go to market, and get the traction. That day is the first a VC wants to hear from that founder, and it is likely the last day the founder would be willing to accept a check, term sheet, etc. from a VC.
Net, with the VC rules, by the time the VC is willing to invest, the solo founder is beyond willing to accept the check.
Of course, if there are several founders, some high burn rate, maxed out credit cards, each of the founder with a pregnant wife, etc., then the VC's check might be more welcome.
But we need to understand: All across the US, entrepreneurs start and grow businesses -- pizza shops, auto body repair, dentist's office, etc. -- without VC investing. Then, the big difference for an IT startup is that some software and current computing, the Internet, etc. can let an entrepreneur make money much faster than a pizza shop. E.g., suppose the founder's business is a new Web site, and a lot of people like to connect. Suppose the site sends 10 Web pages a second with each page with five ads. Suppose get paid (from a report from Mary Meeker at VC firm KPCB) $2 per 1000 ads displayed. Then the monthly revenue would be
10 * 5 * 2 * 3600 * 24 * 30 / 1000 =
259,200
dollars. Heck, sending even just 1 page per second would yield $25,920 a month. Then one founder with $25,920 a month in revenue growing rapidly is just the traction VCs want, but, with that traction, why should the founder want to accept the VC's check?
> Net, with the VC rules, by the time the VC is willing to invest, the solo founder is beyond willing to accept the check.
This is what I don't understand. So often someone is in this position, dips their toe in the VC pool, and a VC says "here, have two million dollars but give me control." Then suddenly their formerly highly-profitable startup has to have 50 staff, a big office building with board rooms and lots of shiny glass, and before they know it they're living off successive rounds of funding then filing for bankruptcy, because a $1mil/quarter 1-man company can't magically produce $50mil/quarter from the same banner ads just by hiring 49 more people.
Why would you not just tell the VC "no thanks, I'm doing fine without interference"? Your company is real at that stage. The dollar signs being waved in your eyes by the VC are not.
Both of you seem to conflate seed stage and growth stage, where the latter is generally series A and beyond.
The below reflects enterprise, and probably in some form, consumer:
1. Seed stage is likely before growable revenue. This may still be an idea. If technology advances are involved, not just a CMS to power PoF (think university startups vs. most Y Combinators), there may be real capital costs (time, equipment, enterprise POC cycles, ...) before there's something growable. This is also known as turning a technical invention into an adopted innovation. A $500K-$2M seed grant for an AI/infrastructure/etc. company would often need that. Without it, they could only really innovate on stapling together other people's technology.
2. In growth stage, there's a link between money spent on sales + marketing + field engineers and generated revenue, and likely, adding bells & whistles to grow into nearby markets. At this point, first mover advantage gets pretty real. Even cooler, revenue should be predictable within some range, so as soon as sales KPIs aren't being hit, hiring etc. can be scaled back to reflect reality. Or, just keep growing because the market is worth it.
In both cases, the goal is to go big fast, e.g., world leader in 3-7 years, vs. the 5-10 year plan. This isn't necessarily about greed: dealing with competitive industry, the desire to work on big things, the desire to work on many things, hiring certain folks, etc.
Of course, if you can do all of the above with a PoF idea, great. However, if you're that good, maybe just pick the right numbers for lottery tickets and use the proceeds to start a research lab? :)
> 1. Seed stage is likely before growable revenue.
In which case from all I can tell, essentially no VC in the country will pay any attention at all. That is, the startup didn't have traction significant and growing rapidly.
For university startups, okay, but have to look in detail at the project plans. As I mentioned, that's possible: E.g., the first version of GPS was a back of the envelope thing by some guys at the Johns Hopkins Applied Physics Lab. That envelope was converted to a project plan; the plan was executed and successful. Lesson: If look carefully, should be able to evaluate the project technology just on paper long before soft/hardware or traction. If the technology really is overwhelmingly powerful for some commercial need, then, sure, should have a successful company. But IT VCs won't look at the details and, instead, just want to look at traction.
For funding of on-going companies, sure, there is a big industry for that from later stage VCs, private equity, M&A, IPOs, etc. There to evaluate a company, make heavy use of accountants and lawyers.
I'm a very stupid and naive person when it comes to this kind of thing, but if I were such a founder, I'd be a little worried that such a VC would invest in a direct competitor to me if I didn't take their check. Of course, they might do that anyway (and other's surely would,) but at least I can imagine competing better if I had more funding.
You want to be defensible, to have a barrier to entry, e.g., to have done some original research that is a bit too obscure for nearly everyone in IT VC and their entrepreneurs, some research that is the powerful, valuable, crucial enabling core of the whole project. That is, want some secret sauce -- no secret sauce, no Big Mac. You want the product/service of your startup to be difficult to duplicate or equal.
If it is really easy for others to duplicate or equal your work, then do some work that is not so easy.
> In fact, Kaplan and Stromberg (2001) and Gompers and Lerner (2001) argue that VCs are particularly successful at solving an important problem in market economies|connecting entrepreneurs with good ideas (but no money) with investors who have money (but no ideas).
IMHO, for information technology (IT) venture capitalists (VCs), this statement about "ideas" is mostly wrong. One reason the statement is wrong is that VCs will rarely even look in any detail at an idea.
In contrast the US NSF and DoD will look very carefully at ideas, e.g., GPS, stealth, measuring the 3 K background radiation. So, will Ph.D. dissertation committees, reviewers at peer reviewed journals of original research, and more. IT VCs won't do such things.
IMHO what IT VCs look at is current traction, that is, users or revenue, and want that traction to be significant and growing rapidly. Then if nothing else is wrong -- team, competition, scalability, etc. -- an IT VC can get very interested.
So, the VCs want the idea already implemented in hard/software (usually software) and in the market and in front of users/customers.
In the world of VCs, the idea is not something from research, that could be in a peer-reviewed papers, etc. but is just a short description of what the business looks like externally to a casual observer, the common man in the street. That there could be anything from a research idea as the crucial core of the business, crucial for getting the traction, being defensible and scalable, etc., is just ignored.
So, suppose some IT founding team has the coveted traction. If they have lots of users, then the team should be able to run ads and get significant revenue. If they have lots of customers, then they should also have significant revenue.
With that revenue, there will be some serious question if the team should accept equity funding, that is, accept the terms, a Delaware C-corporation, the BoD, reporting to the BoD that can fire team members, etc. A C-corp and a BoD bring a lot of overhead.
Really, the example of the romantic match making service Plenty of Fish (PoF) starts to look more important as a example for IT startups in the future. PoF was long just one guy, two old Dell servers, revenue just from ads and the ads just from Google, and $10 million a year in revenue. As in
http://techcrunch.com/2015/07/14/match-group-buys-plentyoffi...
on about July 14, 2015, the solo founder Markus Frind sold out for $575 million.
If a solo founder has a good idea that needs mostly only software, then there is a good chance they can just write the software, bring it to market, get traction, and have revenue enough for rapid organic (that is, funded by earnings from revenue) growth.
That is, a solo founder who invented the idea can keep costs, time on communications, etc. low, write the software, go to market, and get the traction. That day is the first a VC wants to hear from that founder, and it is likely the last day the founder would be willing to accept a check, term sheet, etc. from a VC.
Net, with the VC rules, by the time the VC is willing to invest, the solo founder is beyond willing to accept the check.
Of course, if there are several founders, some high burn rate, maxed out credit cards, each of the founder with a pregnant wife, etc., then the VC's check might be more welcome.
But we need to understand: All across the US, entrepreneurs start and grow businesses -- pizza shops, auto body repair, dentist's office, etc. -- without VC investing. Then, the big difference for an IT startup is that some software and current computing, the Internet, etc. can let an entrepreneur make money much faster than a pizza shop. E.g., suppose the founder's business is a new Web site, and a lot of people like to connect. Suppose the site sends 10 Web pages a second with each page with five ads. Suppose get paid (from a report from Mary Meeker at VC firm KPCB) $2 per 1000 ads displayed. Then the monthly revenue would be
dollars. Heck, sending even just 1 page per second would yield $25,920 a month. Then one founder with $25,920 a month in revenue growing rapidly is just the traction VCs want, but, with that traction, why should the founder want to accept the VC's check?