Venture Capitalists’ Desperate Search

Is getting people to upload goofy pictures of cats and bad English signs a better business than venture capital? Cheezburger Network, the profitable publisher of “I Can Has Cheezburger?” and other absurd Web sites, recently raised $30 million to expand. That venture capitalists are skirmishing to finance oddball ideas that don’t need their cash is a good illustration of the industry’s problems.

Venture capital’s best returns historically have come from the information technology industry — in companies like Sun Microsystems and Oracle. The trouble is, traditional hot sectors like computer production and traditional software have matured. And the hottest area of growth — consumer Internet firms — doesn’t need much capital to thrive.

Companies like Cheezburger, founded by Ben Huh, need comparatively little cash to get off the ground. Input costs, whether they are servers or Internet bandwidth, continue to fall. The software needed to run Web sites is often available free. And finding customers online can be done in an instant if an idea catches on.

It is simple to start a company using savings or angel seed funds and to finance subsequent growth through internally generated cash flow. That is what Cheezburger did. Of course, venture capital can help supercharge growth: Cheezburger plans to hire extra programmers and introduce other improvements.

The upshot of not needing cash is that entrepreneurs can command huge prices for their babies, as Facebook has done by selling stock to Goldman Sachs at a $50 billion valuation. Others can take money off the table, as Groupon’s founders plan to do with part of the $950 million they recently raised. Though those deals may turn out O.K., it’s hard to see venture capital consistently earning outsize returns if business owners are in the driver’s seat in capital-raising negotiations.

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