Why real companies aren't really that cheap to build and why we'll always need VCs

Last week, Sam Lessin of Drop.io hosted a talk on the future of venture capital.  A question was asked as to weather or not there will be a need for venture capital as it becomes cheaper and cheaper to build a company.

I have to be honest...This cheap to build a company thing is one of the biggest steaming heaps of sheep poo I've ever heard.  I keep waiting for some TV voice to say, "You, too, can have a Web 2.0 company of your very own for 3 easy payments of $19.95!"

Yes, it is orders of magnitude cheaper to build an internet web service that hundreds of thousands of people use, but that doesn't make it a company.  Without a business model or significant revenues, you do not have a company.  In fact, you do not even have a product, because, last time I checked, products have the potential to generate revenue. 

Web services with hundreds of thousands, if not millions of users--those are products.  They can start generating revenues because their "product" is access to a community and they sell that to advertisers.  Without a large community, what you have is a prototype--an experience even.  I don't care how many people were in the beta.  I smile when VCs look for "early traction", since I'm not even sure that 100k users is proof of much of anything that seriously de-risks the business.  Yes, you built something, but that doesn't mean it scales, crosses the mainstream chasm, or that it can be a business.  Of course, you'd rather have those people than not, but success is still very much an uphill climb from there. 

To generate significant, sustainable revenues, you have to have sales people, support people, management, marketing people--and last I checked, salaries have gone up in the last x years.  All they do is go up.  So, while you're not paying Microsoft for server software, you're still paying for great marketing people and probably more than you used to.  Real companies have real expenses, like people, rent.  Technology overhead, while dramatically lower, shouldn't be your number one cost once you reach a certain scale--unless you're crawling the web or streaming video, and funny enough, those costs can still pile up.   I don't see YouTube paying their bandwidth bill on spare change yet.

Even if you're PlentyofFish, overhead makes a company.  Despite the revenues, I'm not sure that a company has been built there.  It's certainly not one I'd want to buy, because there's no institutional knowledge, no brand work, etc.  What do you have if you buy it and Markus gets hit buy a bus?  You have someone else's keyword click generator without the instruction manual.  It's certainly not the kind of thing that lasts past the founder, which makes it a really awesome lifestyle business, but not really a company.  In that case, cheap to build has been swaped out for sustainability.

Its not even true that you're getting to market that much faster either.  If you were building a semiconductor company ten years ago, sure it took you two years to complete a chip, but the day it was done, you signed your first million dollar order or someone bought you.  How long is it taking Web 2.0 companies to generate that much in revs?  On average, just as long if not longer.  If your goal is 25 mil in revs and 50-100 people to support that effort, then its really not so cheap to build a company.  Cheaper than it was perhaps, but not discovery of electricity cheaper.  Oh, and whatever magnitude cheaper you're building companies at now is also the magnitude of price degradation in the market.  There's more competition for that discretionary dollar and higher expectation on behalf of the consumer.  If you can build cheap, than someone else can, and then prices go down... so cheap to build doesn't mean sustainable margin expansion.

What about Craigslist?  Twenty something employees driving teens to twenty in revs in 300 cities. 

What about it? 

JK Rowling prints that in a week and she probably has a support team of about that size, too.  She's basically a company. Her licensing deals are just printing money for her at ridiculous margins.  It's a media model, and Craigslist is basically a media company.  

Also keep in mind that, by dollar, web services only represent a tiny percentage of what VCs invest in.  Many VCs are investing in chips, routers, devices, pharma, materials...even retail... Still putting 10-20 million dollars to work in a deal.  None of these companies have been built on Web 2.0 capex models.  They require people, hardware, buildings, tangible products.

So, to think that there's no need for VC anymore because a small percentage of the market needs less money seems a bit silly.