Doing a startup is always tough (been there, done that) and the economic meltdown isn’t going to help; well, unless you’ve found a works-great-in-bad-times niche. Every startup considers venture-capital investment. For most Web startups, this is a lousy idea, and I think the current business climate makes it worse. [This is part of the Tough Times series.]
VC Fear Primer · For my own introduction to things VC-related, see Bouncing Termsheets. Others have covered the territory and written about it well: I recommend Joel Spolsky’s Fixing Venture Capital, Mark Cuban’s The Best Equity is Sweat Equity, and a bunch of pieces by Paul Graham; I particularly like How to Fund a Startup and The Venture Capital Squeeze.
These days you can do a Web startup for almost no money and, within a few months, find out for real if anyone will pay for what you’ve built. So why on earth would you sell part of it before you find that out? I strongly believe that a Web startup’s chance of success is significantly reduced by letting VCs into the picture.
And I think it’ll get even worse. In tough times, it‘s hard for VCs to see how they’re going to get their money back. I bet every serious VC firm in the planet has been having come-to-Jesus meetings this last month or two, trying to figure out how to make it through. They’ll try all sorts of strategies, and I’m pretty sure that one of them will be to get tougher with their investees; they’ll demand more equity, better liquidation preferences, more onerous ratchets, you name it.
Which means that a deal that was already bad is getting worse; just don’t go there.