Venture Capital for Internet Startups

Internet and venture capital were all the rage in 1996 during the first internet bubble. Before, many people did not even know the term and had no idea it existed, but during the boom, VCs quickly became a part of every discussion between entrepreneurs.

It is important to distinguish between VC for internet businesses and VC for traditional industrial applications, because they are very different. An industrial startup, say in the greentech or life sciences sector, usually needs a lot of upfront investment that may not pay off until many years later. Such businesses require a big commitment from a VC, and would otherwise not be feasible. On the other side of the spectrum are internet startups: They normally do not require a lot of capital to get started, as they mainly produce code Other than the founders' time and very limited overhead, no other cost exists. Internet businesses are also "scalable", which means they can serve 10 or 10 million customers with very little changes in infrastructure and business structure.

It used to be that internet startups raised many millions in VC. For example Facebook is very capital heavy, while revenues are slim to none. Google, on the other hand, has raised a lot of VC and is also hugely profitable. Do internet startups still need a lot of capital? I believe no, as there are a few signs that point in this direction:

1. The technology to code and host websites is extremely cheap.
2. The internet is used by almost everybody in the civilized world, so the market is huge.
3. Payment systems to sell products and services online have evolved a great deal, so consumers are used to buy online.

Given such a favorable environment, I think the best thing for any startup on the internet is just to get started. It's obviously still not easy to do that, but with a little guidance and the right idea, I think it's possible.

So before internet entrepreneurs get all hung up on raising venture capital, they should really just get a product to market and start building traction. If they can be profitable after a few months, they should reinvest all monies into scaling up the business. A prime example for this is 37signals with their popular Basecamp software. They did take some VC money after they were already profitable, but only to take money out of the company, so they did not depend on it. This should be an inspiration for internet entrepreneurs today to go it on their own terms, not on the investors' terms.

It is still valuable to have a good team and good advisors who can help guide the business and scale it up properly. This is where a new kind of VC comes in who will lend his expertise and network, but not a lot of capital to achieve a goal. I believe if an internet business needs a lot of capital to get profitable, something is inherently wrong with it. Get cracking, crush it, and the rest will follow.

I wish you all the best with your internet startup!