Paul Graham is famous for being ahead of the curve. After the first dot.com crash, he founded Y Combinator, an internet incubator, based on the fact that the startups he was seeing needed little more than than Ramen soup money to get off the ground.

Now he’s wondering if this economic downturn is going to deal a deathblow to the traditional VC model, something I’ve wondered. I think it is entirely possible. Entrepreneurs need to consider:

• how much revenue gets you to profitability?
• how much gets you to sustainability?
• what if you spend your time and energy getting to customer #1 and beyond instead of raising capital?

With the shuttered VC and credit markets, a lot more startups might be working on building their business rather than raising capital, and it might have unintended consequences. Graham writes:

The reason startups no longer depend so much on VCs is one that everyone in the startup business knows by now: it has gotten much cheaper to start a startup. There are four main reasons: Moore’s law has made hardware cheap; open source has made software free; the web has made marketing and distribution free; and more powerful programming languages mean development teams can be smaller. These changes have pushed the cost of starting a startup down into the noise. In a lot of startups—probaby most startups funded by Y Combinator—the biggest expense is simply the founders’ living expenses. We’ve had startups that were profitable on revenues of $3000 a month.

$3000 is insignificant as revenues go. Why should anyone care about a startup making $3000 a month? Because, although insignificant as revenue, this amount of money can change a startup’s funding situation completely.

There are some businesses that can’t be built without funding. There are many more that you can bootstrap if you’re willing too. Now’s the time to try. If you can get to sustainability without investment, you’re in the driver’s seat.

Today I came across a blog post by Steve Barsh in which he posted his slide deck from a talk he’s gave in SF recently.

Flipping through the deck, I came across one of the most straightforward and insightful presentations of the numbers that a VC is basing investment decisions on, often called “magic ratios.”

If you are trying to raise $2 mil from a VC at a $5 mil valuation, you will need to be able to show a path to a $100 mil exit in 5 yrs to show a 10x return assuming 50% dilution through future rounds.

The implication of this is very clear. It’s easy to talk about raising $2 mil, but you need to be focused on whether there is an exit for your company at $100 mil, and how you are going to get there. That’s what your VC is thinking about.

Check out slide 4 of the slide deck embedded below. Thanks for the insight & clarity Steve.

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VentureBeat reports that Draper Fisher Jurvetson is heading to Russia:

Besides Russia, the fund, called DFJ-VTB Aurora, will invest in the neighboring Commonwealth of Independent States, including Belarus, Georgia, Ukraine (home of another DFJ fund), and others. The fund plans to invest between $2 million and $16 million per company.

Initially, DFJ is not contributing directly to the fund. But, by helping pick companies, it will have the opportunity to co-invest in them down the line. Half of the money will come from the Russian government and twenty percent from the European Bank of Development and Reconstruction.

Thousands of highly-educated engineers and scientists in the region have the skill, talent and motivation to build big companies, said DFJ’s managing director in Russia, Don Wood, in an interview with VentureBeat — they just haven’t had the resources or role models to do so, he says.

This is great to see VC getting on board with the technology opportunities in Russia. Oleg, are you ready to start putting a business plan together for Flatsourcing?

]]> http://chrisschultz.net/2007/09/27/draper-fisher-jurvetson-to-invest-in-russia/feed/ 5 http://chrisschultz.net/2007/06/27/shout-out-to-marc-nathan/ http://chrisschultz.net/2007/06/27/shout-out-to-marc-nathan/#comments Wed, 27 Jun 2007 15:57:25 +0000 Chris Schultz http://chris-schultz-stage.flatsourcing.com/2007/06/27/shout-out-to-marc-nathan/

Long time friend of Voodoo, Marc Nathan was profiled yesterday in the Houston Chronicle. We met Marc just over a year ago at a BarCamp event in Houston. He was one of the first Angel Investors / VC’s that I had ever actually met in person. He’s been extremely helpful to us and always willing to listen and bounce ideas off.

He shares some great red flags that when he hears, he walks:

No. 1 is ‘I don’t have any competition.’ When I hear that, my shutters go up. I put the note on the door that says closed for business. When somebody says that, it means two things: They don’t know who the competition truly is, or they don’t have any competition because nobody wants what they’ve got.

No. 2 red flag is you tell me your numbers are conservative. I automatically cut them in half anyway, so we could go around in circles. At the end of the day, don’t tell me anything. Just show me what you’ve got.

No. 3 — and there are so many of them — but No. 3 is probably saying that you as a management team or CEO are going to be with the company for the life of the company. The opposite of that is telling me that your CEO is going to step aside when more talent comes on board

Glad he’s getting some props over in Houston. Click here for the full article. Thanks to Blake Poutra for sending this our way.

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