One of the more sobering messages from the recent Web 2.0 Conference in San Francisco was succinctly put by Ram Shriram - he mentioned that compared to only 2 IPOs this year, he expected most exits to come in the form of M&A deals in the sub $100 million range. According to Dow Jones Venture Capital Analyst's October issue, median pre-money valuation for a company shipping product (in the IT segment) jumped to about $24 million in the first half of 2006 while median second round pre-money valuation in the same segment was about $20 million. That doesn't leave much room for great returns on investment, let alone killer paybacks such as on YouTube or Google that can easily boost a whole venture portfolio's returns.
This of course can be interpreted in several different ways, but as an angel investor my personal takeaway is to stay focused on early stage investing where chances for greater returns are higher, and then reducing the risk through a combination of portfolio approach, investing in what you know (to add value when needed) and then leveraging new innovative offerings like Amazon's S3, EC2 when applicable, to flex the limited resources of the start-up and pay more attention to developing the product, the revenue model and execution.
As for scrappy and frugal start-ups, I'd rather not subsist on a diet of ramen noodles, was lucky to experience the other side at Google as an entrepreneur in the beginning when we could enjoy pizza or even sushi delivery, so I don't think I will go as far as asking what the founding team usually eats for dinner - especially when my brain works best on good food. Nevertheless, I do have to say that we also did use door panels for table to save money on office furniture and were always very conscious about spending capital most efficiently.
