Saturday, August 11, 2007

Pocket change

I don't know why, but for the past few weeks I've been getting calls from VC's just about every day. Some are the usual analyst calls where they just want to pick your brain about your business to get some ideas on where the industry is going. Some calls are trying to stir up some business to help with a financial 'event' - liquidity, etc. but about 1 in 10 are guys who are serious about cutting checks.

These guys (and gals - sorry Laura!) are working hard to commit their fund to the market. Most of these funds are north of $500 million, so writing $500,000 to $5 million checks just isn't going to cut it for them. Their "standard" low end round would be $20 million because no matter the size of the round, the amount of work required is about the same every time. As long as you are going to do all that work, you might as well write a nice sized check. Especially since you have to work through, say, $750 million dollars. That can take a lot of checks (and work).

This of course would be ideal for them, but not all businesses require that amount of capital, plus most rounds typically (not always) involve a few funds.

Today's web 2.0 (there, I said it) startups are very frugal and don't need a lot of money to get off the ground. This has been a great time for angel funding and many of the successful web 2.0 companies got started with $250,000 or so of angel money. Once their service takes off, it takes money to scale and that's fine. The angel has a decent rolodex and smart VC's (Fred, etc.) are keeping a sharp eye out for these high fliers and can take them to the next level.

There's a fund here in NE Wisconsin that has a whopping $10 million to invest. (it's actually less than $10 million, but we'll cut them a break here) I'm sorry, but $10 million is pocket change. They are writing small checks - essentially angel funding, but the costs are high. One startup did a $250k deal for 60% equity. Ug! There are so many problems here its mind boggling.

First, the fund is so shallow (seriously, $10 million!?!) that if one of their investments takes off, they can't fund the success. It takes money to scale. Real money. The company has to go elsewhere. Secondly, the deals are so bad for the business that its going to be real hard to bring in other money with the valuations and dilutions at those numbers. Third, the fund doesn't have the human resources that the big funds have. Need a CFO or a COO? Good luck with these guys.

There are so many capital options at that level of money that I'm amazed that a deal like this ever happened. I hate to see deals like this because it send a bad message for the state of startups in our neck of the woods. There are some really nice funds here in the midwest and the east and west coast guys are looking for deals anywhere they can find 'em.

Dang, I would have written those guys a check for HALF of what they gave up. Bummer.

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