Thanks to John/Rick for drawing my attention to this great post from Fred Wilson.
Bottom line: you can prototype a great web service for under $1 million. You don’t need to burn $5, $10, $15 million getting it built, as in the 1.0 days. Today, the raw materials are just a lot cheaper.
However, follow-on financings – for the winners – are every bit as important as they were. So you throw fuel on the fire later. (No, maybe this doesn’t apply to plentyoffish.com. But for anything remotely complicated involving some customer service, it does.) It sounds like investors have a greater opportunity to lose less on the losers, and bet more on the winners. That’s more efficient, while still involving some risk. Sounds like a recipe for innovation.
In part this coincides with the exciting growth of innovative means of financing startups. New angel funds and the like are springing up all over. We can feel the buzz just in the Toronto area alone. Several employees of TrueLocal (with Jake Baillie as the managing director) just announced they’ll be overseeing a new investment fund, backed by an investor. And at least a couple of prominent online success-story entrepreneurs are seeking to design investment funds that focus on initial investments of about $1 million.
Meanwhile, reports on investment banking show that there is a lot of cash in the bank, seeking too few deals. One presumes many of those investors will be seeking to put their cash to work in follow-on investments in proven startups. We’ve already seen this with companies like Zillow. We should expect quite a bit more of it in 2-3 years. Let’s face it. There’s still a lot of risk in many of these unproven online ideas, as compared with traditional high-tech and software investments. Smart venture capital is still important; you don’t build and scale a Zillow on a shoestring.
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Andrew Goodman is Principal of Page Zero Media, a marketing consultancy which focuses on maximizing clients’ paid search marketing campaigns.
In 1999 Andrew co-founded Traffick.com, an acclaimed “guide to portals” which foresaw the rise of trends such as paid search and semantic analysis.
