Do Web Entrepreneurs Still Need Venture Capitalists?

| May 20, 2009 | Reply

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There's an interesting article and comment thread going on over at the New York Times on whether web entrepreneurs need VC's like they did ten years ago.

I see both sides of the argument. It's true that costs to build have plummeted, and a couple guys can knock out an iPhone app in a couple weeks. But, to scale in a consumer-centric offering where there is competition, it takes money. And the worst thing you can do is build up a team, launch a product, and not be able to see it to fruition because you don't have the cash necessary to build a following.

There's a hotel being built near my home (I live in downtown San Diego). It has taken them over a year of building – and I'm sure at least and additional 1-2 years of planning – just to get the place where it can produce revenue. In contrast, the city threw up a giant tent for housing homeless people in about two weeks. Do you see the difference? One has much more revenue potential – and that one also requires more capital.

"As the cost of starting a Web company decreases, thanks to cloud
computing
services and technology that entrepreneurs can rent instead
of buy, many founders can finance a new company without the help of
venture capitalists, using their savings, money from family and friends
and credit card debt, Mr. Hendershott writes. More often, they are
choosing to sell small, immature companies instead of taking the
longer, riskier path of developing a business that could one day go
public. That makes venture capital less relevant, he concludes.

“Potentially, the venture model for finding, developing and vetting new Web-based businesses breaks down,” he writes.

The venture capital model evolved to start and expand
capital-intensive semiconductor companies. “Without resources beyond
the reach of most entrepreneurs it simply wasn’t possible to create a
new semiconductor company, or even an Internet company,” Mr.
Hendershott writes. Now, Web start-ups are routinely started for less
than $50,000.

One of the key roles of venture capital, Mr. Hendershott argues, is
providing the money needed to prove that a new technology works and
that a market for the technology exists. During this period, start-ups
rely on outside capital because they are not making any money for
themselves.That period may no longer be necessary."

 

Read the whole article here.

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Category: At Work, Start-Ups, Venture Capital