Ways a VC says no without saying no
In the last few years, for early stage, information technology venture capital, the situation has been changing radically:<p>A blunt fact is, that the VCs very much need big wins, commonly, say, 30% ownership in a company with exit value $1+ billion.  Moreover, even more seriously, to get their limited partners (LPs) excited, they need some ~30% ownership in another Microsoft, Apple, Cisco, Google, or Facebook.  That&#x27;s just the facts of life.  To pass the giggle test, that&#x27;s the game they are playing, the business they have chosen.<p>We need to keep in mind, beyond Moore&#x27;s law and the Internet, the examples Microsoft, Apple, Cisco, Google, or Facebook don&#x27;t have a lot in common.  So, we can&#x27;t hope to extract much in the way of predictive patterns by just external empirical observations.<p>So, if VCs or anyone is to find <i>another Microsoft, ..., Facebook,</i> they they will have to look deeper than just  patterns from external observation.<p>Also we should keep in mind, say,<p><a href="http:&#x2F;&#x2F;www.kauffman.org&#x2F;newsroom&#x2F;2012&#x2F;07&#x2F;institutional-limited-partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-says-new-kauffman-report" rel="nofollow">http:&#x2F;&#x2F;www.kauffman.org&#x2F;newsroom&#x2F;2012&#x2F;07&#x2F;institutional-limit...</a><p>and<p><a href="http:&#x2F;&#x2F;www.avc.com&#x2F;a_vc&#x2F;2013&#x2F;02&#x2F;venture-capital-returns.html#disqus_thread" rel="nofollow">http:&#x2F;&#x2F;www.avc.com&#x2F;a_vc&#x2F;2013&#x2F;02&#x2F;venture-capital-returns.html...</a><p>on the average venture capital return on investment.  One word summary,  the average return is poor, not high enough to excite LPs.<p>Here is a hint at the nature of the radical change:  At<p><a href="http:&#x2F;&#x2F;a16z.com&#x2F;2014&#x2F;07&#x2F;30&#x2F;the-happy-demise-of-the-10x-engineer&#x2F;" rel="nofollow">http:&#x2F;&#x2F;a16z.com&#x2F;2014&#x2F;07&#x2F;30&#x2F;the-happy-demise-of-the-10x-engin...</a><p>Sam Gerstenzang, &quot;The Happy Demise of the 10X Engineer&quot;<p>with in part<p>&quot;This is the new normal:  fewer engineers and dollars to ship code to more users than ever before.  The potential impact of the lone software engineer is soaring.  How long before we have a billion-dollar acquisition offer for a one-engineer startup? &quot;<p>So, a solo founder building a company worth $1 billion?<p>Of course, there is <i>half</i> of an example -- the Canadian, Internet based, romantic matchmaking service Plenty of Fish with a solo founder, with two old Dell servers, $10 million a year in revenue, all just from ads from Google.  He added people and sold out for $500+ million.  So, his ~$500 million is half of the $1 billion A16Z mentioned.<p>So, what are the causes of the radical changes?<p>(1) Cheap Hardware.<p>From any historical comparison, within computing or back to steamships, now computer hardware is cheap, dirt cheap; transistors are cheap; so are compute cycles, floating point operations, main memory sizes, hard disk space, solid state disk space, internal data rates, LAN and Internet data rates, etc.  Dirt cheap.<p>(2) Infrastructure.  It used to be that an information technology startup could expectd to have to build or at least wrestle with lots of infrastructure.  Now quite broadly, getting the needed infrastructure is much easier and cheaper.<p>So, nearly any room in the industrialized world with a cable TV connection can be a quite active server farm because the rest of the infrastructure, to a local Internet service provider, a static IP address, a domain name, and plenty of Internet data rate for a quite serious business, is right at hand.<p>Of course, the big quantum leap in
easy infrastructure is the cloud, from, say, Amazon, Microsoft, etc.<p>(3) Software.  Now software is much easier.  There is a lot of open source software, excellent software for quite reasonable prices, etc.  And  really it&#x27;s much easier just to write new applications level software.  Web pages, graphics, database operations, algorithms, etc., all are much easier.<p>So, with (1)-(3), a solo founder with a good idea for a startup to be worth $1+ billion can for darned little cash write the software, bring up the idea as a Web site, run ads, get publicity, and, if users come, get good revenue.<p>It&#x27;s easy to argue that at current ad rates, a server costing less than $1500, kept busy, could generate monthly revenue $200+ K for investment by the founder of basically just their own time.  Such a solo founder with that revenue, then, will just laugh at any suggestion that he should take an equity check, form a Delaware C-corporation, and report to a BoD.  Instead he will just form an LLC and remain 100% owner.<p>Then, the main issue now is the evaluation of the basic <i>idea</i> of the sole founder.  Or if the idea is really good and VCs wait until there is traction significant and growing rapidly, then the VCs will be too late.  Or, the solo founder wrote the software, has one server from less than $1500 in parts connected to the Internet, has a static IP address and a domain name, has done and is doing some publicity things, and otherwise is running the business each month for not much more than pocket change, for less than a lot of people spend on McDonald&#x27;s or pizza or Chinese carryout.  Literally.  So, the founder&#x27;s startup is just dirt cheap to run.  If enough users like the site to keep the server busy, then the founder is getting maybe $200 K a month in revenue, plenty to grow the size of the server farm, and in a few months buy a nice house, for cash, put several nice new cars in the garage, for cash, and spend a hour each afternoon in the nice infinity  in-ground pool.  Then a VC calls and wants to invest $10 million for 30% of the business and have the founder report to a BoD of a Delaware C-corp.  -- we&#x27;re talking LOL.<p>Does that situation happen very often yet?  Nope.  But now it is just such situations that the VCs desperately need in order to get a significant fraction of ownership in $1+ billion exit values.<p>Or, put very bluntly, the VCs desperately need really exceptional startups.  For Microsoft, ..., Facebook, there are no visible patterns.  The founders no longer need big bucks for a team of developers, expensive servers, and communications data rate.<p>Net, for the projects the VCs must have, by the time they want to invest according to their old rules, a solo founder with a good idea has already got plenty of revenue for rapid organic growth and a life style business and won&#x27;t accept an equity check.<p>Again, so far there are not a lot of examples of such solo founder startups, but the radical change and the big deal for the VCs is that it is just such startups that stand to be the exits the VCs desperately need.  So, for the next Facebook, etc., by the time the VCs call the founder, all they will hear back are laughs, and the VCs will have to push back their chairs, think a little, and realize that they  just missed out.  The VCs will see that, really, there has been a radical change and they must make some radical changes or just miss out and go out of business.<p>So, finally we discover that the core idea is what is just crucial because for a good idea a solo founder can do the rest alone for essentially just his own time as the investment.  So, to evaluate startups, must evaluate the idea at just the idea stage and just hope that the founder will accept a check.