NYT‘s highlighted a report by the International Journal of Entrepreneurship Education yesterday, which claimed the lower start-up costs of launching a digital media company is making it less necessary for entrepreneurs to partner with venture capitalist firms when pursuing their big idea.
And they are right: with third-party services available for pretty much everything from hosting to ad-sales investing in a team is less of an upfront cost than it used to be and often entrepreneurs who have the right contacts can find very talented developers to create a product or website for them for equity at first. But I would be careful to dismiss the need for venture capitalists, especially since many like Spark Capital and Sequoia Capital now make small investments in the $250K range (Union Square Ventures also has for years), for the following reasons…
– Smaller investors often are not a good fit: Stars like Ron Conway and Marc Andreessen aside, many angel investors can be helpful in providing the funding needed to get a product off the ground, but once launched, entrepreneurs may find that they are in bed with someone who doesn’t know or understand the business at all, but has a major say in its affairs (often the final say). While most intentions are good, this can lead to conflicts that actually inhibits the growth of the company.
– VCs have invaluable experience and contacts: Many would argue that half of a start-up’s success comes from knowing the right partnerships to make early on and having the necessary resources to get them done. VCs that specialize in the industry an entrepreneur participates in have probably worked with similar companies in the past and know from experience what generally works and what doesn’t. What’s more they have years of relationship building under their belts and can be very helpful in getting those deals done.
– Choosing the right exit is crucial: I met with the CEO of a start-up recently who said anytime he fields a call from someone about potentially buying his company, he immediately forwards them to his venture capital partner. While this is somewhat drastic, the point is well taken – VCs have the right network to get a sale of the company done, know how to navigate those negotiations, and if the exit option is limited to an IPO even the most sophisticated entrepreneur will need the valuable expertise and experience of a VC to get this done successfully.