Are the high-end venture capital firms changing the game for the elite start-ups they fund? Specifically, are they looking at much smaller investments?

Last week I attended the Web 2.0 Expo session on venture capital that included David Hornik, who wrote afterwards:

“I took part in a panel today called ‘Venture Capital 2.0: Bright Future or Broken Forever.’ It was moderated by Mike Arrington and included some good friends from the investment biz, including Josh Kopelman and Jeff Clavier. It was one of the larger audiences I’ve spoken in front of before — I’m guessing there were as many as 800 people in the room. Crazy. Mike tried hard to get the traditional VCs (me included) to fight with the angel guys (Josh and Jeff). His thesis was that angel investors will ultimately get all of the returns because there is so little money required to build a big internet business these days. While it isn’t an unreasonable assertion, I obviously disagree whole heartedly. As I’ve said before, while it is certainly the case that it takes less money for a web startup to demonstrate traction, I believe it still takes significant capital for a successful internet startup to scale. Nonetheless, the entertainment value was high (which was likely Mike’s real intention). And we had a great time agreeing with each other and disagreeing with Mike.

The most intriguing element there is “there is no little money required to build a big internet business these days.” Panelists seemed to take for granted the idea of taking $500K to launch compared to $2-$5 million in the recent past. Arrington referred back to two classic assumptions on venture capital:

  1. Venture firms normally want at least two other firms involved in every deal they invest.
  2. Venture firms generally want to invest about $2 million as a minimum.
  3. Therefore, venture deals generally involve $4-5 million and up.

However, in this session, Hornik of August Capital and fellow VC Michael Eisenberg of Benchmark Capital both argued that these classic assumptions are no longer true; even the major high-end venture capital firms want to invest a few hundred thousand dollars in the right deal.

What’s the right deal? My guess is it’s a so-called “web 2.0” deal that comes with a management team including web-literate major players from previous web start-ups.  One thing that clearly hasn’t changed is that generally venture capital firms want investments involving proven management teams. There may be exceptions, but that’s the rule.

Tim Berry

Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.