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Web 2.0 Is A Gift (continued)
A number of commenters took my post yesterday on this topic a bit too literally. I mislabeled the x-axis on the charts which made it worse (I've fixed the charts).
My point was not that it still takes $20mm in investment capital to get a web startup to breakeven.
Every company has different economics. Some may never need a dime of capital. Others could require $100mm to get to profitability.
My big point was that the timing of the capital needs has shifted and that helps everyone. The curves I drew were examples to make a point. The specific numbers in them are largely irrelevant.
An interesting follow up point is the question of why the slope of the web 2.0 curve goes steeply upward once the service hits 'scale'.
In my experience, many lighweight businesses find themselves 'getting heavy in a hurry' when things start taking off.
All the things you don't need to build and launch start to hit you all at once when you 'break out'.
I listed many of the things (sales, customer service, capex) in my original post but the list goes on. Real estate, HR, executives, marketing, legal, etc, etc
As Steve Kane said and I will paraphrase, 'the very best people always go up in cost, never down'
This catch up game doesn't last forever and the slope doesn't keep getting steeper and steeper. You can't extrapolate my charts and you can't take them too literaly.
I hope this clears up some confusion.
December 22, 2006 in Venture Capital and Technology | Permalink
Comments
Understood and agreed -- the analogy is if VC is p-o-Ker (spelled this way to avoid spam filter), and the first round is usually the ante, and you wait to put more money down based on performance -- with web 2.0 you can either a) put down a much smaller ante to start or b) wait to put down the ante, and the next bet when it comes has a lot less risk associated with it yet can be big enough to make the model work -- as big as web 1.0 in aggregate
Posted by: AlFromChicago | Dec 22, 2006 9:30:03 AM
As someone who has worked at a web 1.0 company, stuck around during the nuclear winter and now works at a web 2.0 company in the Valley, I have to say that you hit the nail right on the head.
My company is definitely at that break-out moment. Once you've built your infrastructure, you see many revenue opportunities that you must move on because your competitors are right behind you. It also feels like things have gone into hyperdrive starting around the time people started using the title web 2.0 en masse.
Posted by: peter c | Dec 22, 2006 4:21:17 PM
Bottom line, if there is a vibrant, healthy economy there will always be a need for high risk high reward capital. Having been on the other side of the table from VCs numerous times, I've always felt that they have a much higher view of the "value" they create than they actually do. (present company excluded, I dig your blog and you seem to get it). The market will become more predictable, lower cost capital will come in, and the VC-type capital is going to need to move on to the next thing.
Posted by: Steve | Dec 22, 2006 6:11:26 PM
hi
i discussed this matter with a few friends, and we noted that you cover well one option (of going to a VC), but what about the other option - the buyout (by google, yahoo, etc.)?
also, i believe that the real reason VCs do not like to invest in web 2.0 startups is since those startups really do not burn cash as fast as other type of startups. seems weird isn't it? but the goal of a vc is to floud a fast-burning-cash startup with a first round, so when it will need a second round, the enterprenour will be streaped down from his/her control of the startup, and the vc will move in...
Posted by: boaz rossano | Dec 24, 2006 2:23:52 AM
