Paul Graham has (as usual) a very interesting read about why VC's may soon not matter.
The current generation of founders want to raise money from VCs, and Sequoia specifically, because Larry and Sergey took money from VCs, and Sequoia specifically. Imagine what it would do to the VC business if the next hot company didn't take VC at all.
VCs think they're playing a zero sum game. In fact, it's not even that. If you lose a deal to Benchmark, you lose that deal, but VC as an industry still wins. If you lose a deal to None, all VCs lose.
This recession may be different from the one after the Internet Bubble. This time founders may keep starting startups. And if they do, VCs will have to keep writing checks, or they could become irrelevant.
His point is very, very good. But what about performance? Or startup competition? It's not as easy as "Ok, our curves are sky rocketing, and we're ramen profitable - we don't need no stinkin' VC money!"
It's about optimal performance. Can you reach optimal performance without the VC money? If there are more startups there is also more competition. You have to be noticed in the noise.
Consider this chart:
Cash burn over time.
Optimal Performance is about growing as fast as your market and customers allow you. If you burn too fast you waste money. If you don't have enough money you can't reach your optimal performance. Huh?
Well, we're in the disruptive Internet business right? That is: We're changing and adapting customer behaviour. But customers adapt slowly. Back in the bubble I used to work for Red Message. $20M investment by Goldman Sachs in 2000. The went bankrupt, but there are businesses today thriving on the very same idea. Many of the companies back in the bubble burnt through their cash faster than their customers adapter their behaviour. They were all Over Spending. Other examples include Boo.com and Letsbuyit.
Hardware, software, marketing and distribution are all ten to hundred times cheaper now than back in the bubble. But customers are still slow to adapt.
So what am I saying? Well... Sure, with ramen profitability and curves that make any VC open their fat wallet you may not need them. But are you performing at your optimal curve? I doubt it. You're likely Under Performing, even though you may not know it. Even if the tools available for marketing and CRM are cheaper, if you want to reach a global audience chances are you'll use traditional (old) media. Newpapers. Journalists. Catching their attention them takes time and money. Maybe less than before, but still.
Optimal performance is very hard. It's about spending your money where it impacts the changein behaviour and faster adaptation of your customer. And that is very, very hard. No cheap hardware-, software-, marketing-, CRM-, distribution-, whatever-model in the world will help you there. You may just want to watch your curves, listen to and understand your customer better etc. etc. It's all soft, ad-hoc, and less measurable. And finding your optimal curve takes monkey. At least more than ramen money.
So while many things are cheaper, taking VC money to perform at the optimal curve is still necessary in order to stand out in the noise, and outcompete the competition.
What do you think? If my logic is fuzzy, it's because it's friday and I need beer.
