I love looking at the “What they’ll invest” lines from this Business 2.0 article about ideas some VCs want to fund:
- “$3 million for a working application”
- “$5 million for a team of five engineers to create a prototype in less than two years”
- “$2 million for a working demo application”
- “$3 million for a demo application and retail partners ready to test”
- “$5 million for working technology”
- “$6 million to get the auction site developed and running in 18 months”
- “$4 million for a working site and editing software”
- “$5 million to create a working prototype within two years”
- “$3 million over two years for an operating startup with a handful of beta clients”
Wow. To be fair, the article talks about some ideas that are actually capital-intensive — but I pulled the lines above from the software startup ideas. “$5 million for a team of five engineers to create a prototype in less than two years” — for a web site to share spreadsheets!?
I know some of the people on this list, and I’m happy to say that their notional offers aren’t quite so ludicrous. There are plenty of venture firms that know full well how to inject captial at the right rate, and expect progress and milestones far more aggressive than these. But this list sets the wrong expectation, and is absolutely the wrong message for any new business to hear.
The VC world needs to look at what Paul Graham and Y Combinator are doing with 1- to 3-person teams funded at $6,000 per team member. Those teams are turning out some unbelievably great applications in a few months’ time. Yes, some of the ideas are simple to describe and implement, but a lot of them are as or far more complex than the targets above would suggest possible. Take a look at VC David Hornik’s reaction to Paul’s Foo Camp presentation, and you’ll see a much healthier view of what web software startups need today.
Update: VC Fred Wilson has a good take on this issue. I agree with a lot of what he says (not the part about M&A and lower exits as a more permanent condition, but definitely with the line, “Too much money chasing too few good deals”).