<p>Is venture capital becoming obsolete for Web start-ups? Yes, according to Robert Hendershott, a professor of private equity and entrepreneurship at the Leavey School of Business at Santa Clara University. He makes the case in a paper of International Review of Entrepreneurship, formerly known as International Journal of Entrepreneurship Education.<br /><br />As cost of starting a Web company decreases, thanks to cloud computing services and technology that entrepreneurs can rent instead of buy, many founders can finance a new company without the help of venture capitalists, using their savings, money from family and friends and credit card debt, Mr. Hendershott writes. <br /><br />More often, they are choosing to sell small, immature companies instead of taking the longer, riskier path of developing a business that could one day go public. That makes venture capital less relevant, he concludes. <br /><br />“Potentially, the venture model for finding, developing and vetting new Web-based businesses breaks down,” he writes. The venture capital model evolved to start and expand capital-intensive semiconductor companies. Now, Web start-ups are routinely started for less than $50,000. <br /><br />One of the key roles of venture capital, Hendershott argues, is providing the money needed to prove that a new technology works and that a market for the technology exists. During this period, start-ups rely on outside capital because they are not making any money for themselves. <br /><br />That period may no longer be necessary. They can do so with only a few thousand dollars and, in some cases, they end up quitting their day jobs. “In this situation, financing is no longer a crucial component to an entrepreneur’s creativity and passion,” Hendershott writes. <br /><br />“To some extent, this mimics the venture model, where early success yields more capital to fund additional progress, culminating with a few eventual big winners,” he writes. “The end result is that in the next generation of Web-based start-ups, venture capital may not be necessary to prove either the technology viable or that a market exists.” <br /><br />When venture capitalists do finance Web start-ups, they can find themselves at a disconnect with entrepreneurs. Instead of dedicating three to five years to a chip start-up, founders dedicate three to five weeks to building iPhone applications. That means a lot less personal risk and much greater willingness to sell early. Because venture capitalists put less money into Web start-ups, they most likely have less of a say at the negotiating table. “That creates a problem if you’re a VC looking for people with an IPO as their clear goal,” Hendershott said in an interview. <br /></p>
<p>Is venture capital becoming obsolete for Web start-ups? Yes, according to Robert Hendershott, a professor of private equity and entrepreneurship at the Leavey School of Business at Santa Clara University. He makes the case in a paper of International Review of Entrepreneurship, formerly known as International Journal of Entrepreneurship Education.<br /><br />As cost of starting a Web company decreases, thanks to cloud computing services and technology that entrepreneurs can rent instead of buy, many founders can finance a new company without the help of venture capitalists, using their savings, money from family and friends and credit card debt, Mr. Hendershott writes. <br /><br />More often, they are choosing to sell small, immature companies instead of taking the longer, riskier path of developing a business that could one day go public. That makes venture capital less relevant, he concludes. <br /><br />“Potentially, the venture model for finding, developing and vetting new Web-based businesses breaks down,” he writes. The venture capital model evolved to start and expand capital-intensive semiconductor companies. Now, Web start-ups are routinely started for less than $50,000. <br /><br />One of the key roles of venture capital, Hendershott argues, is providing the money needed to prove that a new technology works and that a market for the technology exists. During this period, start-ups rely on outside capital because they are not making any money for themselves. <br /><br />That period may no longer be necessary. They can do so with only a few thousand dollars and, in some cases, they end up quitting their day jobs. “In this situation, financing is no longer a crucial component to an entrepreneur’s creativity and passion,” Hendershott writes. <br /><br />“To some extent, this mimics the venture model, where early success yields more capital to fund additional progress, culminating with a few eventual big winners,” he writes. “The end result is that in the next generation of Web-based start-ups, venture capital may not be necessary to prove either the technology viable or that a market exists.” <br /><br />When venture capitalists do finance Web start-ups, they can find themselves at a disconnect with entrepreneurs. Instead of dedicating three to five years to a chip start-up, founders dedicate three to five weeks to building iPhone applications. That means a lot less personal risk and much greater willingness to sell early. Because venture capitalists put less money into Web start-ups, they most likely have less of a say at the negotiating table. “That creates a problem if you’re a VC looking for people with an IPO as their clear goal,” Hendershott said in an interview. <br /></p>