Part I

Congratulations: Don't feel like the Lone Ranger! In your feelings, suspicions, observations, analyses, and conclusions, you've got plenty of company!

It took me too long to accept that what you describe was the actual reality. Or, you ask for

"innovative VC/Angel funds"

as if we should of course assume that some exist!

For my role and position in this issue, and the 'side of the table I'm on', I'm an entrepreneur writing software for a startup. For this startup I'm the founder, 100% owner, CEO, CFO, Chief Scientist, CIO, biz dev lead, development manager, developer lead, QA tester, software architect, 'full stack' developer, server farm bridge manager, NOC manager, hardware manager, network manager, systems administrator, and janitor. How else?

To help my response to your question I will say a little more: What kind of software? A Web site. Who are my candidate users? Maybe 70% of everyone in the world with Internet access -- that is everyone on the Internet except total dead heads and small children. Porn? No, not at all; actually, nothing objectionable at all. Need? My view is that it's out there, big time, and now served at best poorly. My role? If I'm correct, then my work will serve the need by far the best in the world, with a 'technological' barrier to entry that should last plenty long enough to get barriers to entry from brand, network effects, virality, lock in, users knowing how to use my site, and some cases of continuing contact. Key? Sure, some crucial, core 'secret sauce' that is, really, some applied math with some original theorems and proofs with some advanced prerequisites.

So, I'm addressing what seems clearly to be a huge need and for my 'seriousness' and technological 'credibility' am standing on a strong, i.e., mathematical, foundation.

Status? I have all the crucial, core software ready for at least significant production, likely for much more, and now am doing just routine, and relatively simple, Web site development.

Obstacles? I selected Windows instead of Linux and, thus, had to get good with Visual Basic .NET, ADO.NET, ASP.NET, significant parts of the rest of .NET, and some obscure points of SQL Server administration, and this learning has been only routine but, still, has taken far, Far too long. Otherwise, no obstacles.

Financial status? For VCs and angels, at present my project and a dime wouldn't cover a ten cent cup of coffee.

Next steps? Finish the software, get some initial data, plug together a first server, say, an 8 core AMD processor on a $125 motherboard with 16 GB of ECC main memory and several 2 TB hard disks. Use the Microsoft BizSpark program to get needed copies of Windows Server and SQL Server. Get a static IP address, a domain name, and 15 Mbps upload bandwidth to the Internet. Get some ads from ad networks. Go live and get publicity, users, and ad revenue.

So, assume can get paid $1 per 1000 ads displayed, a Web page with 3 ads can be sent for 200,000 bits, and half fill the 15 Mbps upload bandwidth 24 x 7. Then revenue should be

1 * 3 * 15 * 10^6 * 3600 * 24 * 30 / ( 2 * 200,000 * 1000 ) = 291,600

dollars a month. Ah, grade school arithmetic!

As far as I can tell, equity investors will be interested in my work about the time -- and NOT before -- I have monthly revenue of $291,600 growing rapidly. Then they might want to invest a few million dollars for about 30% of my company. They would get 1-2 Board seats with power to set my compensation, replace me, and sell my company, and I would own 0.00% of my company and get back maybe 55% of my company after a 4 years vesting period if the Board didn't fire me first.

But with monthly revenue of $291,600, why, just why, would I need any equity investment at all? And more seriously, why, just why, would I accept such investment terms?

Basically the soonest equity investors would write a check is some months after I would no longer be interested in their check.

That's my company.

To generalize a little, this grade school arithmetic

1 * 3 * 15 * 10^6 * 3600 * 24 * 30 / ( 2 * 200,000 * 1000 ) = 291,600

is widely understood! So, from the first day I started on this project all the way through 'traction' significant and growing rapidly, I do and pay for everything.

Then, with $291,600 a month in revenue growing rapidly, and thus, qualify for equity funding, suddenly I need an equity investment?

Let's see: From the assumptions above we're talking a peak of

15 * 10^6 / ( 200,000 ) = 75

Web pages a second. An 8 core server for about $1000 might be able to do that, but even if not a week or so of an 8 core server being busy would generate enough revenue for some nice shelf units full of such servers that could deliver 75 pages a second. That is, the computers and bandwidth are cheap; given traction enough to keep a server busy, should have revenue enough to grow server capacity quickly; similarly for bandwidth; net, given the traction equity investors want, don't really need equity funding for computers and bandwidth.

The equity funders insist on all the development already being done, so can't get equity funding for that. What's left for the equity funding?

A lot of people can see this situation: Likely business is in line to see a lot of startups that don't take equity funding: If they get traction, they don't need equity funding. If they don't get traction, they can't get equity funding. Equity funding is beginning to look useless.

Now for more general remarks for this thread: As far as I can tell, for my work or essentially anything in 'information technology', the idea of

"innovative VC/Angel funds"

is nearly irrelevant. That is, as far as I can tell, one could count on one hand all the 'information technology' equity investors in the US who would be at all "innovative". That is, they just will not, Not, NOT look at anything technical. They just will NOT do it. Instead, their investment criteria boils down to one word: Traction. Being 'innovative' has nothing, nichts, nil, nada, zip, zilch, zero to do with their investing.

In more detail, for such equity investors 'traction' is numerical evidence that can be a surrogate for what a private equity investor would get from an audited financial statement. That is, the early stage information technology equity investors are thinking like accountants except are willing to use surrogate measures instead of just strict accounting measures. Then anything 'innovative' and a dime won't cover a 10 cent cup of coffee.

There is some evidence that biomedical venture capital can be more 'innovative', but I concentrate on 'information technology' and set aside biomedical, 'clean energy', materials science, etc.

Moreover I concentrate on just US early stage information technology equity investment.