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Venture Capital: Just Say No

Posted by davidvc on November 14, 2006 at 4:25 PM PST

On Thursday morning at the Web 2.0 forum John Battelle had a fascinating conversation with investors
Ram Shriram and
Roger McNamee

I first have to say off the bat that Ram Shriram had a wonderfully relaxed and friendly demeanor. I found myself feeling like I was his best friend, and that he had my best interests in mind. I am sure that quality serves him well in the role of investor and guide with the various startups he works with.

What surprised me about this discussion was how clear it was to all of them that starting a new Internet venture these days requires such a small amount of capital. Hardware is commodity (and now you can get incredibly cheap deals from Sun with their startup program), all the software is open source, and all the resources you need are available on the Internet. Often the founders can just work out of their homes and use the Web for communication and collaboration.

The impact on the venture capital community is significant. Traditional VC firms usually look for companies where they can invest 20 to 50 million dollars and see a return in three to five years. That's a lot of money, often much more than you need. Ram and Roger were generally recommending that you avoid taking this kind of VC money if you can help it, as it usually comes with expectations that you take the company to a certain net worth within a certain time frame so they can get their money back. As a result VCs exert a lot of pressure and control on the company. You've pimped yourself.

Ram also observed that when a startup takes too much money, it's bad for the business; the founders often don't know what to do with all the money, and you tend to lose focus. He said he likes to see his ventures running lean and mean, eating noodle soup and working out of a garage. So, they recommended that you take as little money as possible - just enough to get by - and you'll turn out better in the long run.

I found this all very invigorating. If I have a good idea (I'm not saying I do, but if I did), it means I could actually get a couple of angel investors, get some cheap hardware from Sun and do everything with open source and deliver something very cool without having to go and pay court to VC firms. Something to think about, for those of you who do have a good idea.

One last tip from Roger McNamee: starting a business is a lot of work. If you're passionate about something so much that it's all you can think about, go for it. But if you can think about something else, then maybe this is not the time...