Big Money Does Not Build Great Online Products

Galen

Aug 2

Startups

Or, Why Dave McClure is Right:

indeed: most VCs are Dinosaurs, and the World Wide Web is an Asteroid that hit the planet in a slow-motion cataclysmic explosion 15 years ago.  It may take another 5 years for the ash clouds & nuclear winter of Browsers, Search Engines, Social Networks, & Mobile Devices to kill all the T-Rexes, but it’s a done deal. The marsupials are taking over, and in 2015 there will be a lot more seed investors that look like Dave McClure, Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Founders Co-op and Founder Collective than any Sand Hill VC.

Take it from a guy who has seen a handful of online real estate competitors raise $5-$10 million each pre-product, hole up for 18-30 months and hire an expensive PR firm to proclaim the release of their huge steaming pile: There is nothing about having a lot of money that improves the odds of a consumer internet startup creating a great product.

The fat startup backlash needs to come to terms with the fact that building a great product is cheap. There are some great examples from the Seattle area – companies like Picnic and UrbanSpoon. While both sold before they became huge companies, they both built phenomenal products that were ready to scale with small, cheap teams. Loads of other companies created in the last 2-4 years have built phenomenal, creative products on the cheap – companies like SmuleXobni, and Chegg – all of whom went on to raise a bunch of cash after they had consumers using their awesome products.

What used to be a laughably small investment – something in the $100,000-$500,000 range – is now enough enough money to build a truly great online product and cultivate an initial base of users. Facebook is the premier example of this phenomenon: Facebook had 200,000 users before they raised a dollar.

Dave McClureJeff ClavierFirst Round CapitalY-CombinatorTechStarsFounders Co-op and Founder Collective know this. At the same time, they aren’t delusional – they know that their companies need more than $100,000-$500,000 to really take off. Because they are investing relatively small amounts, they can make a lot of money with a handful of “dipshit companies” that sell for talent acquisition, a handful of moderate, $20-$50 million successes and a few huge successes.

It is still expensive to grow a company into a billion dollar business. You need a lot of money to flesh out the more expensive parts of a business like marketing, PR and sales and flesh out the product (to dominate the market, per Horowitz’s advice). But because startups today have already eliminated a lot of the risk (product! users!) on a significantly smaller amount of money and dilution, they can demand better terms from VCs or raise more money from a new class of “super angels.” This is good for founders and angels.

All in all, this is good for the rest of us too. This new ecosystem will create extraordinarily more experimentation and ultimately creative destruction than the old VC model: the angel-funding boom is a Cambrian explosion of entrepreneurial life (The Arrington of the Cambrian would have bitched about all the dipshit lifeforms) and when the amount of capital needed to create an online product is so low, products can get built in spite of the VC vetting process.