Web 2.0 start-up survival: Business plans, revenue models required

For Sevin Rosen Funds, “The traditional venture model seems to us to be broken,” Steve Dow, General Partner, believes. The VC firm is therefore returning hundreds of millions in investor commitments lined up for a new fund it was in the process of closing.
Written by Donna Bogatin, Contributor
For Sevin Rosen Funds, “The traditional venture model seems to us to be broken,” Steve Dow, General Partner, believes. The VC firm is therefore returning hundreds of millions in investor commitments lined up for a new fund it was in the process of closing.

Steve Dow is cited by the New York Times

Sevin Rosen, a 25-year-old firm that is among the most respected in the industry, was in the process of closing its 10th fund and had received commitments from investors for $250 million to $300 million, Mr. Dow said. But in a letter sent to those investors yesterday, Sevin Rosen said it had decided to abort that process.

“We have decided to take the radical step of returning the commitments you have given us for Fund X,” the firm wrote.

Explaining its decision, Sevin Rosen...said that too much money had flooded the venture business and too many companies were being given financing in every conceivable sector.

The firm also underscored the consequences of “a terribly weak exit environment”:

While good returns from any given firm’s portfolio is certainly a possibility, the statistics have clearly shifted in an unfavorable direction. The venture environment has changed so that overall returns for the entire industry are way too low and even the upper-quartile returns have dropped to insufficient levels…

If we really believe that there are fundamental structural problems in the venture industry, should we raise our fund and just hope that the problems will get better?

There is also a fundamental problem in the Web 2.0 entrepreneurial mind set today: the cult of what I call the “amateur entrepreneur.”

I have served as Director of Mergers & Acquisitions for Societe Generale and have analyzed thousands of companies in all sectors, in the U.S. and abroad, and considered hundreds of solicitations by start-ups for venture capital.

In the “greed is good” M & A hey day, a business plan was a start-up’s calling card.

Last July, in “Memo to Web 2.0 VCs: What happened to Doriot’s rules?” I lament how today’s Web investments often neglect the founding principles of business plan based investment analysis:

In 1946, ‘A Frenchman with a cool eye formed a publicly traded company to assess thousands of business proposals — and funded the best ones, inventing the modern practice of venture capitalism…Known as the “first venture capitalist,' Doriot’s VC “philosophy” is studied to this day.”

In “Web 2.0 start-up strategy: sellout big” and “Web 2.0 champions don’t champion business plans” I put forth that Web 2.0 start-ups are being led astray by Web 2.0 conventional start-up wisdom:

It is fitting that YCombinator’s Paul Graham did a feature interview with Michael Arrington’s TechCrunch. The two entrepreneurs have a lot in common: they both are making money by promoting Web 2.0 start-ups lacking business plans.

It is ironic that two financially savvy individuals with solid Web 2.0 business plans of their own are enriching themselves by supporting business plan deficient Web 2.0 start-ups…

No need for a “perfect revenue model” in Arrington’s Web 2.0 book. Moreover, Arrington warns that Web 2.0 “losers” all “over business-planned.

Moral of the story to twenty something amateur entrepreneurs? In the words of YCombinator’s Paul Grahm, don’t “sweat the business model” Or, multi-billion dollar corporations are sure to be on the look out for your cool app!

In “Web 2.0 amateur entrepreneurs: failure to succeed” and “Web 2.0 on a shoestring: What bubble?” I posit that Web 2.0 is not beset by a financial bubble, but by a rash of amateur entrepreneurship:

A lightweight, disposable approach to Web 2.0 entrepreneurship is supported by many in the Web 2.0 community…

Twentysomething weekend software developers are encouraged to crank out the latest attempt at the next cool Web 2.0 app. Where is the encouragement, however, for committed long-term personal investments in building successful Web 2.0 companies?

The software application is the easy part and the TechCrunch spotlight is the fun part. The day-in, day-out non-stop dedication to continuous improvement and growth, however, is the hard part.

This Digital Micro-Markets Blog, for its part, is committed to championing a business-plan based Web 2.0 economy.

In my new “The Real Deal” CEO interview series I am showcasing dynamic Web 2.0 entrepreneurship based on rational business plans and revenue models.

Who will you find profiled at “The Real Deal”?

Kevin Rose "Digg: kevin Rose talks "The Real Deal" in exclusive interview"

Donato Montanaro "TradeKing CEO talks "The Real Deal": Web 2.0 meets online trading, in exclusive interview"

Greg Stuart "Interactive Advertising Bureau CEO on click fraud in "Real Deal" exclusive interview"

Stay tuned for a must-read social networking CEO exclusive!

Do you have a Web 2.0 start-up with a business plan?
"The Real Deal" wants to hear from you! Click Below

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