Cheap Infrastructure

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Dharmesh Shah, an investor and entrepreneur who runs a website for software entrepreneurs, agrees that venture capitalists' investment practices are unlikely to change as a result of cheaper infrastructure. "There's no correlation between the amount of money an entrepreneur actually needs and the money a venture capitalist puts into the business," he says. Shah explains that venture capitalists become personally involved with the companies they invest in, taking seats on boards and serving in an advisory role. They need to keep all their money invested, but they only have so much time for board meetings. As a result, it doesn't make economic sense for them to offer Web startups less money.

Shah says he thinks that, rather than building infrastructure, many startups now use venture capital to build staff and increase research. He says that his own company, an Internet marketing system called Hubspot, based in Cambridge, MA, raised $5 million last July but needed only about $150,000 for infrastructure. Much of the additional money, he says, has gone into human resources.

Shah says that he sees human resources as a better use of excess venture capital than the advertising expenditures that were common during the last Internet bubble. He adds that outsourcing infrastructure "just makes practical sense, and allows the entrepreneur to focus on solving the problem the company set out to solve in the first place."

Shah says that while outsourcing infrastructure does free up funds for other things, there are potential problems. He notes that using infrastructure services does put startups at the mercy of those companies' pricing structures and whims. He adds that this could be a reason that larger companies have done better with these services, since they have a name brand to offer.