Web 2.0 Conference - VC 2.0 - An Entrepreneur's market

Participants:
Fred Wilson, Union Square Ventures
Paul Graham, Partner, Y Combinator
Steve Jurvetson, Managing Director, Draper Fisher Jurvetson
Ross Mayfield, CEO, Social Text

I'm sitting on this panel because it really does seem like there's a new buzz going around...

Steve - enterpreneurs are in the drivers seat now. We are out of the doom and gloom period. We are Into the period of hope, optimism and greed.

Fred - cost of building consumer internet apps has dropped. This is an opportunity here.

Ross - The best time to start is in a bust. Started company with $5k. Put in 6 months worth of sweat equity. Iterated with customers quickly. Had to make the effort to make sure that things . Took a $150k round from social networking folks like Mark Pincus. Took 600k total.

Fred - is there a business for VCs anymore with the dropping costs

Paul - Yes you can start a company on a lot less money than you could before. You seem smart, you have a reasonable idea we'll try it out. Willing to make bets around 10k range. Living expenses of grad students. If you have low living expenses you have a huge advantage.

Fred - do traditional VCs go later?

Steve - there are different things going on now. Model in web services lowers the costs of partnerships. Things are much more flexible than before. Sales model is very different. Software is bought not sold. Easier than ever to get products to market Angels having a heyday.

Ross - Web 2.0 is not webservices. Web 2.0 is buliding the social infrastructure. Cultural shift happening among net generation.

Fred - What's really new here?

Ross - Always have a bottom up start demand pattern. Too expensive to sell to the CIO first.

Fred - Is there anything special about Web 2.0 that changes your investing?

Paul - I've never believed the Web 2.0 definiton. Ended up investing all in consumer web applicatoins because that's what we understand and is hot. Corrupt relationship in Enterprise sales now. Do the endrun.  Consultants can sell/install stuff at ridiculous prices. IT departments are ripe for the killing.

Fred - (to Paul) - you are making small capital bets you could make a lot of bets. There's a space between Angels and traditional VCs. Money corrupts.

Ross - Enterprise software companies used to cost $40M to be fully capitalized. $4M today.

Fred - Is Open Source a central aspect of what is happening?

Ross - Yes. There's a cultural choice about what tools to use.

Fred & Steve - both talked about how if there's open source in a company then MSFT and Oracle won't acquire it. IBM Will

Question - I asked, how does Web 2.0 change the VC equation? Are you looking for different things? Are you willing to make smaller bets?
Paul - I only make small investments.
Fred - Avg investment < $2M. How do we manage such small bets? No great answer to that. Ultimately looking for people but can't
Steve - Yes. Engage network effects. Self re-inforcing. Need the community to participate.
Fred - Problem with the IPO is that there's a huge growth after the IPO. As a VC there's not really a difference in sale vs. IPO.

Question - Does taking VC mean that my users will revolt?
Ross - it's a community management issue. You need to set up the social contract with the community.

Question - If I don't need the money should I take it for endorsement?
Fred - You should never take the money don't take the money.Google took it because they had to. Endoresement value is worthless. Only two things that matter . Cash + people who will help you and not hurt you.

Question - Why are the VCs important at all? Justify your role.
Paul - The connections matter. They open the door for you. Board member contacts are valuable.

Question - What's the value of technology vs. community?
Steve - We value community more than technology. Some industries are different like Pharma.

Question - Many entrepreneurs are saying I don't want money or much smaller amounts of money. Maybe 10-20% get early stage funding. Not enough angels around to feed the need. Almost seems like there needs to be an incubator fund.
Paul - That's exactly what I do. You need something mroe organized than angels.
Ross - Maybe VCs can invest individually instead of in a large fund.
Fred - It's been done. 3 VCs came in and started a small venture fund.