Just got back to Boise this morning from Seattle after attending the TiE event in Bellevue. It was a crowded event with lots of smart people - a real international crowd. I learned a lot about what is going on in an ‘A’ market like Seattle, but it’s still confusing as ever as to what the VC’s are looking for, but while working through this post, I am going to try to sort out VC speak.

The panel last night consisted of three start-up CEO’s: Joe Heitzberg of Snapvine; Jordan Mitchell of OthersOnline; and Jonathan Sposato of picnik.com. The three have a lot in common:

• They are all brilliant and talented individuals
• They all have multiple start-ups under their belts
• They each have had a successful exit in a previous start-up
• None of them have a revenue plan

What?

Yep.

None of them have a revenue plan for their current business.

Snapvine is a service that allows people to create audio blogs. You call in to a number, and you can leave a voice based blog posting. They have millions of members. They just closed on $10 million in funding. Cool idea? Yep. Lots of people using it? Yep. But they have no revenue model.

OthersOnline is a social networking site that notifies you when other people like you, are on the site. The site stems from Mitchell’s experience in contextual/behavioral advertising. As he described, when you go to your g-mail, for instance, and you start e-mailing your friends about the new Pinot Noir you had last night, you’ll see that the ads on the right side of the page reflect what you are talking about - contextual/behavioral advertising. Mitchell is a master of it. But what his business doesn’t have right now is a way to make money. (and my problem with ANOTHER social networking site is that his tools can be easily replicated by the bigger players, i.e. Facebook, and then he’s left in the cold. Additionally, this is yet ONE MORE site where I have to maintain a profile - there’s no way to import my existing profile from OpenID or any other site. This is a site that Marc Canter would poo-poo for that reason - one more closed platform I have to maintain).

Jonathan Sposato is an interesting guy. This guy sold his first company to EA - the big gaming firm, and his second company to Google. Huzzah! His new venture is picnik - a web based photo editing tool. It’s probably really cool - I have not tried it yet. However, he too has no revenue plan. He announced last night that they were going to try to charge people for premium editing tools, and see if they would pay. That is the plan at this point. Only time will tell if his subscription plan will net any revenues.

So, discerning readers, what do we make of all this? What are the VCs looking for? Management talent? Revenue potential (that’s what a lot of the literature indicates)? Defensible IP? Barriers to entry? All the above?

I think it is one thing, and one thing only: likelihood of a massive exit.

All these guys have management talent. For them, that is a plus. But with a $10 million ‘A’ round, you can hire just about anyone you need - and even make them come to Boise, ID. So that can’t be the real issue for VCs.

Revenue potential? Well, clearly that can’t be the case, even though every VC will tell you flat out it is a DEAL BREAKER if your company can’t produce $x in revenues within a certain period. Pronetos has one of the most clearly articulated and simplest revenue plans, in a U.S. market segment (academic publishing) worth more than $10 billion annually, and we still get people scratching their heads and asking us if maybe we can charge for our social networking platform (the answer to that is NO by the way, and I note that no one from Madrona suggested to any of these fine gentlemen that they charge a user fee for their services).

Defensible IP? Every investor asks about that, and let me just say that in the Web 2.0 world, there is no such thing. Let’s just agree on that and move forward. You can’t realistically defend the IP of any of the three companies were talking about here, and I doubt any of the founders are trying. They are trying to do one thing: penetrate their markets.

How about the old ‘barriers to entry’ red herring. C’mon - Facebook could have a contextual application up tomorrow, there’s dozens of photo editors out there, and there are lots of people into mobile and voice apps - ESPECIALLY in Seattle (there’s this guy there named Craig McCaw . . . ). So barriers to entry is a non-starter as an argument for investing/not investing.

So it has to be the likelihood of a massive exit.

And that brings up two more interesting points. First, if I am correct, what are the determinants of the potential for a massive exit? My suspicion is that a VC would tell you: 1) huge revenue potential; 2) defensible IP; 3) huge barriers to entry; and, 4) skilled management. But we already know that those can’t be the factors.

Sure, Mitchell, Heitzeberg, and Sposato have sold companies, or taken them public, so maybe THAT is what the VCs consider a good indicator. But again, with $10mm, any entrepreneur with a proven concept can go get a guy that’s led a start-up to exit a half dozen times.

What all three of these companies do have, is the potential to sell for gigantic multiples. Which gives rise to this question: why deal with the VCs at all? Additionally, why bother with employees, business plans, or any of that stuff? If you are where these three guys are, pick up the phone, and get an investment banker on the horn to start shopping your company to the big boys. You don’t need funding, you need the exit. (Sure, maybe you need a couple bucks to keep you running while the IB shops your app, but aren’t we all telling the VCs that advertising will pay for operations?? Not only that, in Seattle they talk about how advertising IS the end game in all of this so they’ve hit the Kool-aid hard)

So if I have learned anything from my night in Seattle, I think it boils down to two things: Web 2.0 is about proving the concept, and finding a buyer.

(And good luck to Snapvine, OthersOnline, and picnik - these are all awesome ideas and those guys definitely don’t need my well-wishing to get ahead; they’ve all got bulls by the horns)