I love this debate. I also love how it focuses solely on the Web 2.0 companies out there. The latest article over on alarm:clock summarizes my previous point well: (Bold is my own emphasis)
No doubt about it, it is possible for an ad-supported publishers, a social network or Web application to launch today on credit cards. But these represent a fraction of the companies that VCs are funding.The problem with this article is that it gives the impression that VC activity is centered on Web 2.0 companies, when in fact Web 2.0 deals are a fraction of VC investment. Outside Web 2.0, the costs of launching a start-up have not collapsed. Just look at the deals in the works today alone:
Brightcove is looking to raise $55M. That’s a lot of money, but Brightcove could not keep pace without it. Brightcove has 20 job openings, in their 4 offices and they probably have 200-300 expensive employees to keep in shoes. Moreover, while some costs have gone down, video serving remains terribly expensive. Brightcove is playing for huge stakes and should afford to waste some dollars to grow more quickly than revenues.
Over in Norway, Norsun raised $23M. You are going to tell us that entrepreneurs are going to build a solar panel assembly plant by putting a few thousand dollars on their credit cards.
Then there’s BlackArrow which raised $14.75M today for its video ad serving technology. We can imagine some kids out of a college developing a video ad server and putting it on the Internet. But BlackArrow needs to hire some expensive BD, sales and sales engineers to knock on the doors at ad agencies CBS, CNN and elsewhere and they need to convince people there that BlackArrow will be in business in 5 years.
Also, many of the Web 2.0 companies that are so cheap to start are extremely expensive to scale. YouTube is an excellent example with their multi-million dollar monthly bandwidth cost.
I’m a fan of capital efficiency, but the vast majority of startups need significant sums of money just to reach break even- if you don’t believe me, just look into Space 2.0 and the annual Anari X-prize. Prototypes there run into the tens if not hundreds of millions.