VCs Innovate VC

An interesting development in venture financing is the creation of the “lean finance” model. This is an adaptation to winner-take-all markets; i.e., markets in which the best performer captures a massive share of the market. The funding model is to provide the minimum funding necessary to reach the point at which it becomes apparent who the winner is likely to be. Then, investors do a huge, “shovel-in” round of funding to seal it. On Friday, the Swedish commerce startup Klarna raised $155m following its May, 2010 round of only $9m.

Dropbox, a company whose product is well-known in academic circles, similarly raised $250m at the point it boasted 45m users, following a previous round of only $7m. An intriguing wrinkle is that different experts may have different opinions about  who the winner is going to be. Around the same time Dropbox raised its shovel-in round of funding, so did one of its primary competitors, Box.net, which raised $81m at the point it hit 7m users.  The solution to the puzzle may be that Box.net is viewed as the likely winner of enterprise segment (having turned down a $500m acquisition offer), while Dropbox is poised to take the personal user segment.

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