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Less Venture Capital

Good read from Clarence Wooten via the 37 Signals blog:
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. The old style of venture capital just doesn’t work for the type of company generally seen profiled on TechCrunch.

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.

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