A third critical distinction between a normal venture capital deal and the sub-venture model is in the type of software built and used. When I approached a VC a number of years ago with an RSS venture idea, one of the factors he mentioned that was a deal-killer was that I was licensing software in the business plan instead of building (or “rolling”) my own software.
Most of the VCs I pay attention to (for example, Brad Feld and Seth Levine of Mobius VC) are loathsome of software patents, but they still want to have their companies building their own customized online applications and back-end administrative systems. The thinking surely goes that you don’t want others to be able to build a copy too easily or cheaply.
They’ve done very well with their model, which included an investment in Feedburner. It sold to Google for $100 million. I talked with Seth about this one time when I was saying a start-up I worked on should build an ad network that would incorporate a new ad unit I was proposing. His face turned white, as his recent experience with doing the same thing with Feedburner showed it wasn’t so easy to do. (Ironically, I believe the system Feedburner built was scrapped in favor of Adsense and Adwords for Feeds.)
In the sub-venture model, the idea is to use open source software instead of creating a system from scratch. Using a good content management system (CMS) like Drupal, which is constantly adding features for implementing new applications and is infinitely extensible, is the idea behind building out the public face of a sub-venture company. Of course, Drupal is by no means easy to master. It’s best to have a PHP guru and a UI expert who have worked with Drupal to help build out the feature set you want on your site. But there’s the rub. Instead of taking multiple people to build a site and the applications it will incorporate, you probably only need one or two other people, and they could likely even be outside contractors.
Even better, Drupal is now part of most hosting plans, so you can work on it and have it hosted for almost nothing while you’re starting up. There’s no need for expensive servers while you build up the business. Companies like Bluehost have plans that are completely sufficient for building up a site and driving decent amounts of traffic to, and those plans start at under $10 per month!
If you don’t need something as sophisticated as Drupal for integrating all sorts of Web 2.0 features, you can always go with WordPress. (WordPress is also available easily through Bluehost.) If you’re selling an information product or just trying to monetize traffic from SEO, you can try even easier systems like BeBiz or Sitesell.
Here’s the main point in the sub-venture model that’s different in terms of the sites and software you’ll build. In the sub-venture model, you need to build it cheaply and quickly, and then focus on seeing if you can get and monetize traffic using that open source software.
Recently, this distinction between the sub-venture model and the normal VC modus operandi was blurred. Nowpublic.com, which was a venture-backed company, actually built its system on Drupal. They were just acquired by the parent company of Examiner, which is a hyper-local news site. The Now Public sale to a larger company is great news for the open source community and for the sub-venture model. (It was also great news for the founders, employees and VCs involved, too, I assume!)
The reason for the success of Now Public is obvious in hindsight. They built their brand and their community instead of their software. (A lot of customization and money went into their application, but the backbone of the system is still Drupal.) If money can be saved on engineering and used to build traffic and community, then that’s the method of choice for the sub-venture model.