Going Small

In The List the other day, I linked to this article from Business 2.0 about the Incredibly Shrinking VC Model. The article deals with a trend that is becoming increasingly common in Venture circles: small investments.

Charles River has started up an early stage fund which parcels out $250,000. Y Combinator picks out a few promising startups and gives them $20,000 seed investments. 

Giza itself has the Ofek project, where we do small seed investments with an eye to putting in more serious money during Round A. In the last year, we have done five such deals, and we have a handful of others in the pipeline at the moment.

Why all the seed funding all of a sudden? Obviously, it's a reaction to the way the high-tech market is going. Internet companies are hot commodities again, but Internet companies are relatively cheap to start (given the drop in bandwidth costs as well as the availability of open-source software).

Also, a lot of VCs got burned badly during Bubble 1.0 by companies whose burn rates were wildly disproportionate to revenues. This time around, the emphasis is on lean and mean startups. All of which means that a lot less money is needed at first.

The model makes a lot of sense. As opposed to semiconductors or telecom equipment, with Internet companies, you can usually get some idea if the product will work in a relatively short time period, a year or less. The idea is to put down a small bet, see if it has traction, then put down a bigger bet later.

The only downside, of course, is that we have limited bandwidth as far as our ability to help manage our portfolio companies. And a $250,000 investment involves as much work going forward as a $2,500,000 and sometimes even more (smaller companies with less experienced entrepreneurs often need more help and guidance). So it would be very difficult to invest a large-size fund of $100M or more just on these types of deals.

However, we have high hopes for this model. In the end I think it's good for both VCs and entrepreneurs. And I hope to be proven right.