The mention of $250k at the end is, I believe, telling. This size of deal isn't really available, yet it could well be the most useful to modern startups, especially as a seed round.
YC, despite being compelling to young entrepreneurs, presents too high an opportunity cost for a season professional, yet a megabuck is too much for an initial build.
For technical folks bootstrapping say a iphone or fb app is very little money and 25-150k could be used for market validation - another very important part of the startup cycle. If the entrepreneur is say a business person who can't code anymore then a prototype cost will be roughly 25k or so just to get an initial build this still isn't enough to launch. So getting a customer immediately is very important and working capital to service and grow.
There are only two ways to get money for a startup: 1) top line revenue from a product or service or 2) sell equity or do a debt note. That's it.
I've estimated that the required amount for a "real" seed round in today's open source environment for tech ventures is about 200-300k. That is unless you are young and can do the coding yourself. However technology isn't the driver any more for startups. The scarce talent is business model engineering and product marketing - building for scale isn't the problem anymore. I can build a hack protytype that works well into the "validation" stage to establish a funding event or customer revenue stream then use the new capital to rebuild, hire and grow.
Obviously (I hope, based on my original comment), I don't disagree with your estimate, but I'm curious as to what it's based on.
I think YC has demonstrated that a $10-$20k initial seed round is enough for a software-only prototype in a few months, assuming technical founders. Presumably there's a comparable cost to your "rebuild," though please correct me if I'm wrong.
Honestly, that was my problem the during two or so go-rounds ago. I had the first free podcast hosting company some six years ago, and it quickly grew to thousands of podcasters in a matter of months, seizing close to half the world's podcasters at the time.
I wanted to grow it past what I was capable of doing on my own, and I started talking to VCs. They were all trying to get me to write budgets for ten, twenty million. My cost was my time and my server bill. I really had no idea what to do with that much money.
I coulda used $100k-$500k to build out a sales team, hire a few developers, maybe a content manager, and be fully funded for at least two years or so...
.. oddly, I couldn't find anyone who was willing to fund me for a reasonable amount, and there was no way I could justify an insane valuation the tens of millions guys wanted.
This is exactly what we are going through. The VCs we talk to want to see revenue projections of $50MM+ in 5 years and want a project plan for investment in $MM. All we need is in $150k range and it is extremely difficult to find money in that tier. We have decided to continue boot strapping and stop wasting time for now.
Depending on your location, it sounds like the closest thing to what you want is to find a patron or an incubator/accelerator. They aren't that common everywhere, so it's probably just as effective as playing the lottery if you aren't in a tech hotspot.
SiliconANGLE incubates a few startups along those lines (SALabs), and for a time we were looking to align with a larger fund to do that on a more scaled up capacity, but it seems like the establishment VC firms aren't particularly interested in that concept.
Now that I reflect on our past conversations with said parties, I imagine that it's entirely possible that they're highly interested in the idea, but the wheels of their business move so damn slowly that at some point in the next two years one of them will come back and say "let's do it." I'm not holding my breath.
John's jotted down some thoughts on how VC is breaking - he and I had a phone conversation on it this morning - I agree with a lot of what he's saying.
If you have any thoughts or quibbles, I'm interested in hearing them - we're trying to get a wide array of input before we do a long-ish post on it.
I would have loved $200K-ish for a seed round. For a startup today the feasible options are $20K from friends & fam or $1M after somehow making a prototype with "traction" over a couple of years. That step function kills a lot of good companies. Once that gets solved the current level of startup activity will seem quaint.
The problem is where the money comes from upstream. The LPs in a fund want huge returns in 5 to 10 years. The work of raising money is so great that VCs do it all at once (hah, that sounds familiar). Then they are locked in.
The YC model is trying very hard to form a conduit of startups up to larger but sub-$1M rounds, but so far no one's figured how to get that tier established. You probably don't want money from podiatrists and i-bankers, but neither does there seem enough talented geek millionaires who want to join in.
A somewhat tangential meme is making the rounds of the VC bloggers at the moment which might be applicable to the point of this article: the current VC model is mostly broken because VC firms make too much money on the carry, so they raise huge funds (using past history during the 'fat' years to justify them to LPs) and this increases the pressure to deliver invest in larger chunks and aim for unrealistic returns on these large investments.
If a firm's GPs expect a seven-figure base of compensation they are going to want to raise 200-500MM depending on the size of the firm, which is difficult to effectively distribute in chunks of less than 10MM.
This is where it gets above my head and into John's wheelhouse, but for the sake of humoring a VC newb like me ...
... why couldn't these lower cost deals scale out? Couldn't they make more investments at lower initial valuations rather than less investments at unrealistic valuations?
Maybe it's because I live in this world nearly 24/7, but I can look at the press and the presentation of everything I get pitched by the PR flacks on a daily basis and make a snap judgement on at least 80% of what I see as to whether or not it's going to last or make money.
I'm not 100% right, but I'm right a lot more than I'm wrong.
If I'm just a pundit, a guy who blabs for a living (who, btw, isn't very expensive to employ), why can't more folks like me be employed by these VC firms to scale up these low cost investments?
Is there something completely wrong-headed about what I'm asking that I just don't get?
One thing about the post that seems a little odd is that it talks about an alternate view of wealth creation - some company that presumably could never IPO though is still valuable - yet ends on a note which yields to the assumption that a company is not a success unless it becomes an Apple or HP type behemoth.
I was just making the point that the possibility of creating a huge "home run" which is the desired VC outcome (eg like an Apple or HP) is difficult when VCs "pass" on what looks like a few guys making an iphone app or something.
My other point is that many entrepreneurs need more than 25k to build their prototype yet fail to do it do to the clutter in the funding market hence two guys building in a garage for a customer project might not get funded in today's climate.
To me if an entrepreneur can create a product get it to market and get profitable they are a success and possibly could be a big "home run". If the investment thesis is to get the home run then it most likely will overlook two guys in a garage.
YC, despite being compelling to young entrepreneurs, presents too high an opportunity cost for a season professional, yet a megabuck is too much for an initial build.