September 13, 2010

We've Got Them on the Run!

TechChrunch recently posted this terrific article by Michael Arrington about the way plunging costs for Web startups are putting the squeeze on some of the white shoe VC funds. This allows entrepreneurs to get by with smaller seed rounds from angels and startup incubators (or just forgo funding altogether, thank you very much). The VCs aren't invited to the party until the valuations are much higher, which is starting to hurt their returns.

To the VCs, the lean startup movement has become synonymous with entrepreneurs who lower their sights and settle for mediocrity instead of building the next Apple or Google. One of them even referred to bootstrapped or lean startups as "dipshit companies." Jason Cohen at A Smart Bear is having none of it:

Rather than provide a cogent argument for why founders ought to take VC money anyway, the response is to call the company a "dipshit" and reveal the astounding arrogance that a few founders selling their company for $25m is somehow a failure.

What's going on here? I think Jason's right that this gnashing of teeth reflects the VCs' mounting frustration about being squeezed out of the startup ecosystem and attracting fewer deals on their preferred terms. It also exposes a widely-held belief that the size of the initial investment somehow determines a company's growth potential, but I don't see the correlation. As I've pointed out before, Apple, Microsoft, and Dell all managed to become tech heavyweights without significant early funding. The lesson here is that the best opportunities don't always need a lot of capital.

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