Fred Wilson has chimed in and added to the recent discussion around seed / micro VC funds and what they mean for the future of startup fundraising. The post and the previous one it refers to are worth reading as always.
Fred lays out a great business case for web 2.0 and its impact on the VC funding model:
“… it still takes on average $20mm to get a web startup to sustainable positive cash flow. But the vast majority of that capital will be required after the business has “traction.”
What has changed in technology venture capital is not so much the total capital requirements, but when they are required. This is very good news for everyone involved. It means entrepreneurs that don’t have to take expensive dilution early on in the development of their business. And it means that entrepreneurs can raise the big money later on when their business is worth more. It means that entrepreneurs should be able to keep more of the companies they start. That is good for everyone.
It also means that VCs don’t have to take big risks early on.”
There is an unwritten message here though that I think is important, especially for 1st time entrepreneurs: that venture capital is about accelerating something you already have, something with early signs of product /market fit and traction.
Gone are the days when you can show up to a VC with an idea and some mock ups and get funded (unless you have prior track record). And “early stage” in the VC world means post product market fit, post beta launch (even if its just a private beta).
So, where do you turn to for the pre-traction funding? Ideally, no one. In an ideal World you follow the Foursquare example that Fred cites and build something yourself. Historically, angels have funded pre-VC, but I have found that since the Fall 2008 credit crunch, angels have moved upstream. When VC went dark for a while, angels stepped up and got to see companies with more traction and proof points than before. Companies that used to be the exclusive domain of VCs.
Maybe things will revert back to normal, and the super angel funds can play a role. But if I were an angel I’d still want the more mature deals, especially since they were being valued at seed levels.
So, even though it is part of the VC family, this new breed of micro / seed VC funds is likely to be the best source of pre-traction funding. Though, your best bet is to bootstrap to build and launch something first. Then seek funding.