One of the problems in venture capital today is a fundamental impedance mismatch: fund sizes remain large, while capital requirements for many Internet\/software deals are shrinking.<\/p>\n
You don’t need much money anymore for many software ideas: the software stack is free, servers can be rented for $50-$100\/month, and there’s cheap labor offshore. There are a lot of ideas that can be vetted for $100k to $1m.<\/p>\n
At the same time, venture funds have grown and stayed big, driven in part by VC compensation. As I wrote in an earlier post<\/a>: venture isn’t generating great returns these days, pushing VCs to make their money on fees. The larger the fund, the larger the fees.<\/p>\n The mismatch happens when you do the math: for a $200m fund with 4 partners, each partner needs to invest $50m. If each partner does 1-2 new deals\/year, and the fund is committed over 3 years, then each investment has to be a $8-$16m commitment. (That doesn’t mean that Series A needs to be $8m, but it means that the total invested is in that range).<\/p>\n You can see where it is hard for many firms to do $1m investments — it’s just too small. And some of the most interesting stuff is happening “down there”!<\/p>\n","protected":false},"excerpt":{"rendered":" One of the problems in venture capital today is a fundamental impedance mismatch: fund sizes remain large, while capital requirements for many Internet\/software deals are shrinking. You don’t need much money anymore for many software ideas: the software stack is … Continue reading