(draft) John Furrier on the Coming Entreprenurial Counter Culture

Honestly, that was my problem the during two or so go-rounds ago. I had the first free podcast hosting company some six years ago, and it quickly grew to thousands of podcasters in a matter of months, seizing close to half the world's podcasters at the time.

I wanted to grow it past what I was capable of doing on my own, and I started talking to VCs. They were all trying to get me to write budgets for ten, twenty million. My cost was my time and my server bill. I really had no idea what to do with that much money.

I coulda used $100k-$500k to build out a sales team, hire a few developers, maybe a content manager, and be fully funded for at least two years or so...

.. oddly, I couldn't find anyone who was willing to fund me for a reasonable amount, and there was no way I could justify an insane valuation the tens of millions guys wanted.

For technical folks bootstrapping say a iphone or fb app is very little money and 25-150k could be used for market validation - another very important part of the startup cycle. If the entrepreneur is say a business person who can't code anymore then a prototype cost will be roughly 25k or so just to get an initial build this still isn't enough to launch. So getting a customer immediately is very important and working capital to service and grow.

There are only two ways to get money for a startup: 1) top line revenue from a product or service or 2) sell equity or do a debt note. That's it.

I've estimated that the required amount for a "real" seed round in today's open source environment for tech ventures is about 200-300k. That is unless you are young and can do the coding yourself. However technology isn't the driver any more for startups. The scarce talent is business model engineering and product marketing - building for scale isn't the problem anymore. I can build a hack protytype that works well into the "validation" stage to establish a funding event or customer revenue stream then use the new capital to rebuild, hire and grow.

I would have loved $200K-ish for a seed round. For a startup today the feasible options are $20K from friends & fam or $1M after somehow making a prototype with "traction" over a couple of years. That step function kills a lot of good companies. Once that gets solved the current level of startup activity will seem quaint.

The problem is where the money comes from upstream. The LPs in a fund want huge returns in 5 to 10 years. The work of raising money is so great that VCs do it all at once (hah, that sounds familiar). Then they are locked in.

The YC model is trying very hard to form a conduit of startups up to larger but sub-$1M rounds, but so far no one's figured how to get that tier established. You probably don't want money from podiatrists and i-bankers, but neither does there seem enough talented geek millionaires who want to join in.

One thing about the post that seems a little odd is that it talks about an alternate view of wealth creation - some company that presumably could never IPO though is still valuable - yet ends on a note which yields to the assumption that a company is not a success unless it becomes an Apple or HP type behemoth.

A somewhat tangential meme is making the rounds of the VC bloggers at the moment which might be applicable to the point of this article: the current VC model is mostly broken because VC firms make too much money on the carry, so they raise huge funds (using past history during the 'fat' years to justify them to LPs) and this increases the pressure to deliver invest in larger chunks and aim for unrealistic returns on these large investments.

If a firm's GPs expect a seven-figure base of compensation they are going to want to raise 200-500MM depending on the size of the firm, which is difficult to effectively distribute in chunks of less than 10MM.