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.



Contributions

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From: Steven Livingstone (Oct 16 2008, at 12:00)

You are of course spot on. I think the vast majority of services don't need external funding. In many cases if they gain traction they'll need to scale, but profile will bring the required funding anyway.

What is very valuable, is to have the right people involved and I suspect that is even harder. I'm working on an idea and my concentration is on a model that will support my and my family first - so i need a customer or two. Only then I will see if it will scale up and require funding.

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From: Robert Impey (Oct 16 2008, at 19:12)

While I agree that VC firms are probably going to be even more dragon-like in tougher economical times, will not a shortage of credit from the bank make VC even more essential?

How easy is it to get a loan from a bank to start any company right now?

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From: mtkd (Oct 17 2008, at 08:48)

It's conceivable there will be a lot of tax breaks for VC type investments once the downturn is fully under way.

Property and equity markets are likely to be stagnant for some time once the drops are over, so it's possible VC could be flowing like never before in 9 months time.

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From: Eddie (Oct 19 2008, at 16:24)

> 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.

Yes. Spot on. The perfect example is the stupid Sequoia Capital presentation that has been circulating with its first page about R.I.P.

Who gives a you-know-what about Sequoia's own insecurity? Oh, poor little Sequoia Capital, how we entrepreneurs really feel so bad for you, look at the crocodile tears we're all shedding for you. Boo hoo ... so no we are supposed to "listen" to your anxiety and insecurity and you're going to try and bring down our spirits and scare us? I can't stand these fear mongers. Its time for a VC shake out just like we need many greedy hedge funds to die.

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