Oct 6

Marc Hedlund

Marc Hedlund

VCs with low expectations

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").

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Comments: 15

  Campbell [10.07.06 03:31 AM]

"The VC world needs to look at what Paul Graham and Y Combinator are doing" - Fully agree. Nice to see someone finally raise this issue.

  fred [10.07.06 08:38 AM]


this post taken together with the seven rosen thing makes me think that some people just don't see what's really going on

  Gene Mate [10.07.06 08:53 AM]

A friend of mine has non-invasive working versions, and patents and test studies at a hospital to back it up, for the heart monitor mentioned in the article, namely "wireless devices capable of 24/7 patient and data monitoring for conditions such as heart disease and diabetes." The VC in question turned them down sight unseen. They didn't even seem to want to check into the devices. So I question the validity of the list. I would have thought a non-invasive solution would be preferable to an invasive one, and that's the only thing he and I can figure would result in being turned down. Their technology works. It's been tested. They have patents. They even had a couple of customers, but they need money to keep going. His has run out.

He keeps looking but finds medical funding difficult to attain and is probably just going to give up.

  web2dotfive [10.07.06 10:53 AM]

Business 2.0 prints and publishes crap.

  Vera Bass [10.07.06 07:32 PM]

No question about "Too much money chasing too few good deals" and also another fan of Paul Graham here as a valuable contributor to the development community for young entrepreneurs.

What I found interesting about the 2.0 article was the range of ideas themselves. Most were traditionally tech sexy, and the rest either media or big money sexy. I did scan it quickly, but only one ...the indie artist ecommerce social network combo... sounded remotely mass user sexy, if in a trendily skewed way.


  Li Evans [10.07.06 07:37 PM]

Nice round up and commentary. Thanks for updating with Fred Wilson's take too.

  Lars [10.08.06 01:11 AM]

I liked this usage scenario for an heads-up display in cars: "you can stare straight ahead with hands on the wheel to drive and check e-mail at the same time".

I guess you'll also receive a free entry for a Darwin award.

(Otoh, a plain heads-up display of your dash instruments would be useful).

  JP [10.08.06 06:35 PM]

The market balances itself. Yeah, its easy to build some of those ideas, but at the same time, making money is less about the actual software and more about a decent/ok product that hits a market updraft at the right place, right time, and fills that market need. Hitting that sweet spot is worth far more than the bits and bytes ever will be. Software is a commodity, the deal with the market is the real focus here.

  Brian McConnell [10.09.06 01:17 PM]

Having started three companies, I can tell you that $6000 per team member gets you part of somebody's time for a month or two, and probably not their full attention. Talented people, especially people with mortgages, families, etc, need to draw a paycheck, and if they're in the Bay Area, they're going to cost you $100,000-$200,000 per year with overhead.

Some products invent themselves quickly, but it usually takes two or three passes to get things right. Time spent coding does not capture time spend thinking about, designing and redesigning a product.

My current business is a case in point. We've been working on our products for well over a year. We have five people working on the products full-time, more if you count contractors. At this point, we have at least a million dollars in terms of time and money invested.

That's still cheap compared to what it used to cost to build telecom applications just a few years ago. If we tried to build our product in 2002, we would have easily spent close to a million dollars on hardware alone.

My point is that it costs a lot of money to hire and retain good people. So the numbers in this list may be a bit high, but overall look pretty reasonable, especially when you consider that VCs prefer to over-invest so companies have a safety margin in their bank account. Nobody is happy if a company runs out of money and subsequently goes through a recapitalization.

  Tom Hynes [10.09.06 01:37 PM]

I guess there are two sides to every start-up. I believe that the Paul Graham/Y Combinator approach of small teams at $6K a piece can work. I am in the process of launcing a web 2.0 based service now that was built on even less money than this.

Sure you can spend more, as Brian suggests above, if that endeavour is a developing teams sole source of income. However, there is still a lot you can accomplish by working evenings and weekends and a good helping of dedication.

$6000?!? I wish I had $6000!

  Ben Chess [10.09.06 01:55 PM]

I had a different understanding of those VC offers. My understanding was that VC would front the money *following* the stated requirements. Make a good, convincing, working app, get $3m. Not that it takes $3m to make the working app. The money is for the next step.

  Marc Hedlund [10.09.06 02:46 PM]


"for a team of five engineers to create a prototype in less than two years" is future perfect tense. I disagree with your read, at least in most of those cases (though I agree that the question asked of the VC may have been different than "what would you invest" suggests).

  Marc Hedlund [10.09.06 03:02 PM]


I agree with your general point that money helps you to get someone's full attention, and get people with more experience. Part of Paul's method is to explicitly choose people with no experience and no needs, so that $6,000 will take them through prototype development.

But, the larger point still stands -- in that "$5 million for a prototype" example, the investor was talking about allocating $500,000/year per engineer. Of course some of that is office and hosting costs, and they will likely have at least one non-engineer, but comparing $500,000 per person for a prototype in two years to $6,000 per person for a prototype in three months makes it pretty clear that one of those is out of bounds. Even at $100,000 per person annual salary and twice the Y Combinator amount of time (six months), you still only get to 1/10th the investment amount they're talking about.

  Brian McConnell [10.09.06 04:18 PM]

I've found a good rule of thumb is to plan on $100-200K per full-time person per year. Even if you're paying the full-time person less, you inevitably have to hire part-time or contract people to fill in gaps.

If a project only costs a few thousand dollars to build, this is, in my view, a red flag. It means there's really no barrier to entry, and that if your idea catches on, you'll be dealing with a lot of knockoffs. If you get lucky and grow big fast, maybe that's good, but that's a crapshoot.

One of the things I like about telecom is that it requires a lot of subject matter expertise that, for whatever reason, is harder to come by than web development expertise. It's not just about coding, but also familiarity with business practices, vendors, etc. It is still a competitive industry, but the higher cost of developing telecom services, and the scarcer population of experts means you'll be dealing with a few competitors not 200 of them.

I'm personally not a big fan of moonlighting. If a project really requires months or a year commitment, it's really hard for people to maintain a 60-80 hour workweek for that length of time, especially more established people who have a life, family, etc. It can also open you up to a lot of legal issues if, for example, your day job is somehow related. I know it's an option for smaller projects, but I think if you're going to start a business, the core team needs to be committed to it. Otherwise it's too easy to lose momentum when someone key to the project gets burned out, bored, etc.

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