VC or BA money?

April 1, 2007 at 3:43 pm 1 comment

Knowing that there are different sources for a Web 2.0 startup to get funded – which money should the founder(s) (team) take? VC or BA money?

The second Internet hype has some similarities with the situation 7 years ago. Startups and founder(s) team(s) are growing like mushrooms after a wet summer. Hundreds of new business cases are popping up and are starting to execute. Like in 2000 some teams don’t even start to think about revenue streams when they start the business.

VCs are sometimes desperate to invest in promising cases. But there are some big differences as well. I would say very positive differences. First, the valuations are more realistic compared to the year 2000. VCs learned something and they didn’t forget it. Because of lost or still underperforming funds from the years 1999-2001 they are not blindly investing.

But most importantly, compared to the first hype there is more money from Business Angels now available. Not only money – the money is smarter than 7 years ago. There are a lot of actively investing Business Angels in Germany who both money and a brilliant network and the experience to actively support the teams. These Business Angels, whether they are investing alone or in Business Angels funds and teams, are in direct competition to VCs.

Most Web 2.0 startups need a lot less capital to get started compared with their matured or already dead brothers from the late nineties. Today they just need enough for a few servers and to feed a few University students, at least in the first stage. This type of A-round doesn’t fit with large VC funds, which are having a tough time finding smart, large investments and are left with a lot of cash sitting around.

Sometimes VCs investments don’t fit with a young, first stage Web 2.0 team because:

  • Some VC’s have a lack of entrepreneurial expertise vs. BA’s have “been there, done it” and were successful
  • VC investment’s take about 5 months (average) to process from start to
  • VCs are less flexible in their investment as a result of mandatory terms and conditions of their respective funds
  • The requested monthly reporting is sometimes waste of time and resources for a Web 2.0 startup
  • VCs have a good network for exits and next round investments, but sometimes fall short of adding long-term operational value.

Conclusion: If you are looking for a VC investment – make sure the VC understands your business and will add entrepreneurial know-how. There are different kinds of VCs in the market. Talk to their portfolio companies as a reference.

VCs now better understand the situation and are changing their processes and behaviors slightly in order to meet the requirements of a Web 2.0 startup. Some VCs are even taking a proactive step towards making feeder investments in order to secure a possible second round investment. They are starting to act like Business Angels – opportunistically, fast and brief.

Keeping the downside of a VC investment in mind, it makes sense for a Web 2.0 startup to contact VCs as part of a second round investment. Just consider a combined A-round with BAs and VCs.

One last small piece of advice to all the Web 2.0 founder teams:
Your business model shouldn’t be forgotten, too. I’d encourage startups to work on developing a little more diversified revenue stream than just ads. Yes, Google makes a ton of money on ads, but a good and scalable business model shouldn’t be solely build on Google-Ads.
Yes, the number of registered users is important for your valuation but I dare to promise that this will change a bit. You shouldn’t believe that the valuation of StudiVZ is repeatable without a business model and solid revenue streams.

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Entry filed under: Investments, Startups.

What a startup CEO shouldn’t miss? (part 1) The race for the eyeball time

1 Comment Add your own

  • 1. stephanv  |  May 14, 2007 at 8:28 am

    “You shouldn’t believe that the valuation of StudiVZ is repeatable without a business model and solid revenue streams.”
    I totally agree. Luck doesn’t work twice the same way. 😉
    All the others have to do it with hard work.

    Reply

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