Clarence Wooten: a VC pitching “Less Venture Capital” Jason 04 Dec 2005

7 comments Latest by Mike Rundle

I met Clarence at Web 2.0 and really enjoyed our chat. He’s a serial entrepreneur who’s moved over to the funding side of the equation. I think seeing and experiencing things from both sides makes his perspective twice as valuable.

He just wrote a piece on “Less Venture Capital

The average venture capital fund size currently stands at $280 million, which presents a problem for VCs focused on investing in early-stage software companies. Generally speaking, the larger the fund, the more money it must invest on a deal-by-deal basis in order to justify the time commitment by the fund. But significant venture funding is not what today’s capital-efficient, Web 2.0 startups need — especially those that leverage the LAMP-stack, open-source frameworks and blog-fueled promotion.

He goes on to say…

Instead of VCs changing their model to invest smaller amounts, we are seeing an increase in Series A valuations. It’s not that startups have suddenly becoming more valuable, it’s that funds need to deploy larger amounts of capital. Considering the movement towards less capital and competition by the likes of Google, VC’s are increasing the valuations of young companies. The valuation increase enables the fund to deploy enough capital to make the investment worth their time.

But…

The problem is that increased capital is always accompanied by expectations of increased return, which translates to increased time to liquidity and increased market risk. Unfortunately for the entrepreneur, additional capital seldom equals additional return. If the company is going to be sold, the acquisition price has to be significantly higher than it would be had the entrepreneur taken less venture capital to begin with. If it isn’t significantly higher, the entrepreneur stands to lose out on all or a substantial portion of their return. As many experienced during the bubble, this outcome was the norm, not the exception.

Read the rest of the article on Clarence’s blog.

7 comments so far (Jump to latest)

Michael Baehr 04 Dec 05

If VC firms reorient towards smaller investments and more rapid turnarounds, do you think your average new web start up in 2005 should court them?

I know 37signals makes a big point out of not having had any venture funding that wasn’t from its principals themselves.

Walker Hamilton 04 Dec 05

I wouldn’t want to deal with the firms willing to invest small anyway. Small to me means thousands, not hundreds of thousands or even higher.

I can start a company with what I can and ramp up (technologically and financially). Why would I want to lose control of even the slightest amount of decision making?

dmr 04 Dec 05

Wow, $280 million? Who can handle that kind of money? What would you even do with all that? Talk about a business that needs to grasp the “less” perspective.

So OK, let’s just say 37 signals *could* get their hands on $280 million? How would you guys use it?

Michal Migurski 04 Dec 05

It doesn’t seem to make much sense for VC’s to “downmarket” by investing smaller amounts - it isn’t their niche. They exist to handle high-risk-high-reward ventures. Smaller companies I’m familiar with pool their startup funds from savings, business loans, and friends & family.

Clarence Wooten 05 Dec 05

Interesting comments. Small to a VC, at least as far as our firm is concerned, means $250k - $1.5MM invested vs. $3MM- $6MM for an early-stage company. Small means investing very early and adding value beyond capital. It also means gauging the marketplace and remaining right-sized so that you can seriously consider any exit that makes sense — even if it happens early in the company’s lifecycle. If market momentum and adoption explode (i.e., the network effect) before large incumbents enter the market, then raise a significant funding round at a much higher valuation to pursue a much larger later-stage exit.

DaleV 05 Dec 05

My cat’s breath smells like cat food, Clarence.

Mike Rundle 05 Dec 05

It all depends on the industry. A few guys working from their apartments can bust out a web application in no time at all now thanks to new technologies like Django or RoR. Those guys basically need money to cover their expenses (rent, food) since hardware is nearly free and software is free.

Funding a company like a medical startup or a widget manufacturer is entirely different because those companies need places to “make things” or money to buy real estate, etc. Those are the startups that need $50MM. The smaller guys can get away with lower capital because they just don’t need it.

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