The New (New) Paradigm
It is no secret that it costs a lot less to start a web-based business or develop an iphone, fb or other “light” app these days. This is great for entrepreneurs that have access to the reduced capital requirements and not so great for some early stage venture investors who are finding themselves with less buyer power. Some early stage VCs and incubators, however, are finding ways through economies of scale (light diligence, standardized seed investment documents, and so on) to invest low dollar amounts in early stage companies. This phenomenon doesn’t as acutely affect mid to late stage VCs who can still plow lots of cash into startups for growth capital or the top-flight VCs that all founders want to work with.
A scrappy startup called Chart.ly sold itself to StockTwits this week for $10,000 (not a typo) and a 50/50 ad-revenue share arrangement. Companies that realize that there is no sense building what they can buy at the right price can grow quickly by acquiring these startups on the cheap. Is M&A the new R&D? The VCs who acknowledge this trend will advise their cash-rich startups (generally an oxymoron, I know) to invest in an M&A/BD hire and won’t block exits that have low multiples but high earn-out potential.
