I've been watching trends in VC investment recently via Mashable and cannot help but wonder how some of these companies are attracting money. Partly, I'm awe-struck by the ability of whoever's leading the pitch to bring in the cash, but mostly I just don't get it. Here's how it must go:
Pitch: "We have an amazing idea for a new web phenomenon which we think will bring in lots of users and as such, having already built the thing (that being the time-consuming expensive part where money might be useful) and with 50 users including all of our extended family, we would like you to give us some money so we can spend it on marketing, hire consultants and get a piece on Mashable. We will use the piece on Mashable as evidence that we are hot and show it to all our friends in the pub whilst we're 'networking' and 'team building'. We estimate it will cost £5m to both find the right marketing manager and pay the consultant we use to find them. Oh and we don't have any predicted revenue streams but we think [google/yahoo] will buy it because it has rounded edges, lots and lots of Ajax and a stupid name. We think Bob at Google will pay at least £200m for us because I met him once at a conference and now we're buddies."
Few of these businesses seem to:
a) have revenue streams (what if google doesn't buy them?)
b) necessarily solve a problem/meet a desire
Here's an example which in my opinion fulfils b) at least (a is just too easy). A large VC-backed firm has just entered our market in the UK offering outsourced tutors over the internet. The lead guy has run other companies, though not in this market or related to education. The market potential is apparently huge because lots of people want tutoring/to improve their child's educational prospects. Ok, fine. But do they want to be tutored over the internet by someone at the other side of the world? Did anyone ask that question? I.e., does their solution solve the problem from the customer's perspective? I'm not debating that we all want a good education but is that particular notion the way people want to receive said education?
Someone tell me, am I missing something? I genuinely would like to know.
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Yes they do want it and do have a better experience with it. But that is not the real problem with their model. They need to reduce their tutor salaries way more than it is already or increase the rates they charge for the students / Month than they are doing. They have used up the last few rounds of VC capital, and now they are back for more this year and a few VC are out there backing them because they want the tax breaks they are getting.
Vish from the US
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