There has been a lot of talk about how Web 2.0 doesn’t need VCs. The general outline of the discussion is thus:

  • Web 2.0 companies are capital efficient and don’t need a lot of money
  • they should start small and grow efficiently
  • VCs have certain size thresholds below which they won’t fund because the overhead involved in managing 50 small investments doesn’t make sense when they could instead manage 10 investments that are 5 times larger

So this leaves the Web 2.0 companies somewhat in the lurch (DabbleDB’s recent funding round by Kedrosky/Ventures West aside – Kedrosky is an exception to the rule because he “gets it.”)

I’m curious to know if there are any funds out there that are trying to place say 30 placments of $100-200K. This would only be a total fund size of $6M which is peanuts to a VC. But it would be interesting to see if the pay-off would be worth it.

Particularly in light of the recent posting about Vinod Khosla’s successes having come from his smaller rounds. (No, I’m not suggesting that I can pick companies like Mr. Khosla! In fact, if you believe the numbers, firms such as his see the majority of the good deals and the rest of the world never gets to see them, which throws this argument off significantly.)

This came up again Day 2 of Gnomedex 2006 when Marc Canter and Dave Winer commented to a fellow from Intel that “any time Intel Capital funds a company – we assume that the company is going to fail” and they suggested that Intel Capital look at breaking their fund up into much smaller chunks and funding 1000 companies for a $100K each rather than 10 companies for $10M each. (I may have those numbers totally wrong – I didn’t capture the full comment in my notes.)

Brad Feld disagrees with this approach.

Regardless of how it is done, for my company it would be interesting to do either a placement model or licensing model or even throwback to the days of artistic patronage and come up with some sort of “sponsorship” approach where we can, in a low-friction way, put funds into promising and interesting startups with as little contractual friction and impact on both companies as possible. I’m not sure if there is any other model other than the ones currently being employed.

What do you think?