The Revolution Won’t Be Funded
Aaron Swartz checked his bank account balance at an ATM yesterday and found a few extra zeros there. Another day another Web 2.0 acquisition. Things are starting to heat up, but something is different right now. These guys are doing it the Web 2.0 way: agile rapid development, quick ramp up, and early exit through acquisition. Living in the same house, working on the project for less than a year, and being picked up by Conde Nast for what is rumored to be $65 mil.
The interesting thing is that they were only funded for $100,000.
This is what is making the VC’s nervous. $100,000 is angel money, maybe even just friends and family money. From Reddit’s own blog:
As reddit grew, we were never quite sure where it would take us. To keep up with reddit’s growth, we’d need to decide between taking more investment or getting acquired. As much as we enjoyed VCs taking us out to lunch, CondeNet’s pitch was a little more enticing (they had better food).
So, the revolution is now, and the money is getting smaller. It’s going from bootstrapping (like us) to minimal funding. This means that the VC model is going to have to change.
Sevin Rosen Funds just returned $300 million to investors because of a “terribly weak exit environment.” Tell that to the guys from Reddit. The exit environment is there, its just changing, and for right now, its not the IPO route from Web 1.0.
Charles River Ventures is giving loans a try. They want to seed companies with 6% interest unsecured loans of up to $250,000 just for the right to invest in the company’s first venture round. The point they are missing here is $250,000 might be (probably is) all that company will need to get to exit.
My instinct is that the best model for this environment is Paul Graham’s Y Combinator. Well, that and something new that I’m working on with a couple of friends in Houston. Stay tuned, because the venture capital game is changing, and small is the new big. We’re going to try to figure it out because the revolution is clearly now.