I bet your startup should NOT raise venture capital. In fact, I think there is a good chance that venture capital could ruin your technology business. It’s true that some businesses need to raise substantial amounts of funding to create value. However, many of the companies that I talk to, especially in the Web 2.0 space, do not need venture funding and probably should not attempt to raise funding from VCs.
Let me provide a little bit of context here, so that hopefully you can understand where I am coming from (and hopefully so that you don’t think I’m a cocky jerk.) Yesterday I attended a roundtable Web 2.0 session sponsored by TCN over at Babson College. It was a good event that was quite well attended. I met a number of smart people who were starting internet businesses. (Also, please note that in this post I’m talking about internet businesses – some other industries such as semiconductors or clean technology have clear up front capital needs and most likely have to raise venture funding.)
During a panel discussion, a well known and quite successful venture capitalist was answering questions from the audience. As this VC was speaking, I could see the entrepreneurs in the audience becoming depressed as the VC made it clear how hard it was for the typical Web 2.0 company to create venture returns, and thus how difficult it would for the startups in the audience to raise venture funding.
On Monday I attended Amazon’s Web Services user group meeting in Boston. The event was attended by at least 50 startups (several of whom had pretty cool businesses), and a few venture capitalists as well. While I was a little disappointed by the lack of detail on the Amazon product road map that was presented, I did find the event useful. In particular, Amazon announced a new contest for startups using Amazon’s Web Services. The AWS Startup Challenge will award cash and web service credits to the winners. I’d encourage any startups using the Amazon platform to check out the rules and prizes.
These sorts of contests are good for startups for several reasons:
You probably read quite a few articles on how to answer this question. You have heard extreme things like, “your idea is not worth anything unless you implement it” and “this is how you calculate the true value of your idea”. Well, I am not going to spend anytime addressing this question from that perspective. Instead, I want to share my thoughts on what I think an idea is worth during a firm’s lifetime. I believe the value of an idea diminishes as time passes and instead, is replaced by the value of its execution.
Day 1: Firm’s value = The idea’s value
On day one, all of you have is the idea. You do not have a product, customers, revenues and of course profits. Most likely, you don’t have a team either. The firm’s value is same as the value of your idea. It could be $0, $1000, or a $1,000,000. Whatever that number is, your firm’s entire value is the number.
Prasad and I have been blogging about cloud computing and how it has sparked a massive round of new web services innovation. The advantages of using cloud computing for a startup’s backend are obvious; Prasad has touched on them before: low capital outlays; no long term contracts; Scale up and down on a whim; high availability, security and reliability, etc. However, if it is easier for your startup to enter a market due to cloud computing, then it is also easier for others. One way I’ve seen startups attempt to build barriers to entry/competitive differentiation is by using the data created by customers as a weapon.
This is just a quick post to let startups who are using Amazon’s web services know about “AWS Startup Tour.” Amazon’s web services team is on the road meeting with startup CEOs this month, and will be in Boston on September 22nd. I think, besides me, several other venture capitalists will be there as well.
Prasad has posted on the cloud computing revolution and how it is enabling a new wave of startup innovation. As the cost of launching a new business drops we are seeing some very interesting web-based companies that would not have been possible just a few short years ago. AWS seems to be dominating the startup cloud services market. Here is a great chance for startup CEOs and CTOs to interact with the team behind AWS. I’ll be there and I hope you are too!