Tuesday, November 07, 2006

Funding Software Companies Ain't What It Used To Be

Over the last few months, I have been perplexed at the amount of money that continues to be raised by -- and given to -- start-up software companies. In the late '80s/early '90s, I was fortunate enough to be at start-ups like Sybase and Business Objects. In those days, you raised as much money as you can because the sky was the limit in terms of your potential valuation via an IPO. These days, however, the potential liquidity events for a start-up are much more limited. Chances are, if you are a "successful" company, you will be acquired before your valuation is $100M; IPOs are rare events. If this is the case, why do companies continue to raise lots of money? For each additional round of financing, the bar becomes higher in terms of achieving a valuation that will make everybody happy.

In addition, it doesn't require as much money as before to get a company off the ground. I recently had the pleasure of working at JotSpot and the company's co-founder and CEO, Joe Kraus, has a much quoted blog entry on this topic.

There seems to be a fundamental disconnect here. Liquidity events are rare and when they do occur, they are for relatively low valuations. Companies don't need a whole lot of money these days to get started. Yet, as a part of their model, VCs want to give lots of money to start-ups, in hopes of hitting that "home run". Something has to give.

Well, it looks like things are starting to change. An article in the NY Times sums things up pretty nicely.

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