I got back from the Valley Thursday and what I gathered from the people there is the same as what I’ve heard here: that many seed companies are having a hard time raising money.

Yes, second rounds are always hard, after you’ve built the product but before it has made much money. The difference is that today’s first-round investors are angels and seed funds, which sometimes aren’t even set up to participate in many follow-on rounds.

What’s made that worse is the market is becoming more cautious around post-seed deals. Everyone criticized the Wall Street Journal’s Pui-Wing Tam for being the first to notice a cash-crunch for seed-stage companies seeking follow-on rounds, but I think she nailed it.

Some early-stage entrepreneurs are now clawing at the walls, begging supporters for money and time. Many investors never promised more money or much time. The premise of some seed investments, especially from larger funds, is “optionality.”

Rather than making a serious commitment to a handful of seed-stage companies, larger funds are buying the right from many startups to lead a later round in the hope that one or two of them catches on with consumers.

One reason for this is that consumer internet investing has become a hit-driven business. Who could pick the next Twitter? When the question is one of tickling consumers’ fickle fancy, rather than a rational process of evaluating technology, it’s a crapshoot. So some investors play at the dollar tables, and roll the dice all night long.

This approach has led to the creation of more new businesses over the past 24 months than the Valley has likely ever seen. It has given entrepreneurs a shot at success many never would have otherwise gotten.

And some don’t need any more capital or advice beyond a seed round of financing. But I did, especially when I was first starting out.

I co-founded a company, Plumtree, that raised seed capital from Sequoia. Kirill, Joe and I closed the round, walked out to an ATM to check our balance, and began laughing hysterically.

Things went downhill from there. A co-founder left. Nobody bought the product. And we ran out of money. I felt like I was digging deeper and deeper into a hopelessly dark mine, looking for gold.

Then Pierre Lamond, the Sequoia partner on the deal, began working out of our office, acting as the virtual CEO.  Pierre made a point of being there the day one of his other companies went public. We looked at a news photo of all the smiling people, who seemed to be living in a gated community, on a planet I would never visit. Then Pierre said “that company was once even more screwed up than you are.”

I clung to that statement through Plumtree’s early days, and returned to it again when Dave and I were working out of an apartment trying to figure out how to make Redfin work .

To find a new lead investor to join Sequoia on Plumtree’s board, Pierre drove me all over Palo Alto and Menlo Park in his car. It was the first time I’d visited the Promised Land of the Valley itself, and it was nice to see it through his windshield.

I cherished the conversations we had on those trips: about how Pierre founded National Semiconductor, or built the Cray supercomputer. He asked me what I enjoyed doing outside of Plumtree and I said “reading.” He saw what a little stress-monkey I was and said I should spend a few minutes reading a book every night; it’s advice I still try to follow.

At each stop, Pierre promised he would work closely with the new investor on Plumtree, and possibly on other deals too. I was then released by my nervous handler to perform in the conference room like a zoo animal on The Tonight Show.

You may think it wasn’t really a fiasco, but one detail should suffice to convince you it was: at one point, I lugged a full-sized server around because we couldn’t get the product to work on a laptop, or over the web. I tried to get the server going under the table before the partner came into the room but sooner or later he  always asked, “What is that humming?” It was the sound of a thousand memory leaks spinning up the disk drive and every other internal gizmo into a panic.

That anyone gave us money was a miracle. But once we get the money, we prospered, eventually becoming one of only two technology companies to go public in 2002. I wondered why Sequoia went to such great lengths to get Plumtree funded when it would have been easier to write off the few hundred thousand dollars invested in our company.

And the simple answer was that Sequoia cared about its reputation and stood by its companies. Someone later told me that a Sequoia partner liked to say, “We don’t want you staggering around, with your fly down and a drink in your hand, telling the whole world ‘We’re a Sequoia company.’”

If Sequoia hadn’t saved us, I would have decided that my startup fling was folly. Plumtree would have just disappeared, and everyone would have thought it was a terrible idea. Redfin wouldn’t have the executives it has now, and neither would AdMob, Xoom, Atlassian, Zendesk, Piazza, The Climate Corporation or any of the other companies now being led, in part or in total, by Plumtree people.

It seems a shame to me that few of today’s seed-stage entrepreneurs will get the same support we did. I promise you, we were even more screwed up than you are.

What that means is that there are more Internet startups with massive revenue growth than I can keep track of, and I can keep track of quite a few. It means that when TechCrunch’s Sarah Lacy argues that high-revenue startups like Zynga and Facebook operate in a completely different universe than the rest of Silicon Valley, she isn’t completely right.

We heard the same argument from plenty of folks when we wondered what Mint would be worth now: that the increase in valuations of Zynga and Facebook are totally unrelated to those of earlier-stage startups, because only a few venture-backed Internet companies are generating serious revenues.

What I’m seeing instead is different: yes Zynga and Facebook are in the major leagues, but there is a very healthy farm system with plenty of prospects moving up through the ranks. This is why the broad-based increase in valuations isn’t just  inflation, but the result of Internet startups’ getting much, much better at generating revenue.

What happened? First, at the end of 2008 startups finally stopped listening to the most misinterpreted — and sometimes just wrong — advice in the Internet’s history: Chris Anderson’s insistence, just as Apple opened the iTunes store to software and venture funding hit the skids, that everything on the Internet be free.

To be sure, the idea of a free trial application is a good one, but many entrepreneurs became squeamish about ever asking consumers to get out their wallets. Music was Mr. Anderson’s primary example of a good that consumers would stop buying, but now Pandora, the company with the temerity to charge for music, is going public.

As we’ve argued many, many times before, as early as 2008, a whole new generation of entrepreneurs has learned from Steve Jobs to ask consumers to pay, early and often, for mobile applications like Angry Birds, or virtual goods in Farmville, or actual goods like clothes, textbooks and baby gear:

Startups have turned to the most direct way to get money: from their users. And consumers are ready to buy, buying software fast-food style on the iPhone, and shelling out for premium subscriptions on sites like Picnik and Animoto.

The change has been good, for startups and for the consumers buying their software, the quality of which has improved immeasurably over the past few years. Now, most of the companies that got serious about generating revenues are growing like crazy. It isn’t too stuck-up to call this change a new Internet era.

The first era was the 1990′s Age of Eyeballs, when every website sought to get as many visitors as possible, without regard for the cost of gaining each visitor or the revenues each generated.  The second was the mid-2000′s Age of Acquisition, when Paul Graham encouraged most entrepreneurs to build websites as features of a larger product, and the goal was to get bought by Google or some lesser light. Since big, unsustainable startups had failed in 1990s, small became  beautiful.

Now we are in The Age of Revenues, in which many Internet startups are maturing into big companies with big revenues. We’ll see more companies invest in large tele-sales operations — the whale-hunting salesmen are mostly relics, as small transactions have flourished like plankton — and we’ll see more companies grow, with more accretive acquisitions at much higher prices. And though there will undoubtedly be more ups and downs, we’ll see more public offerings too.

With great revenues come great power: a new generation of Internet titans. After years of insisting that the Internet had matured, nobody now believes that in two years the only Web behemoths will be Microsoft, Google and Yahoo. In fact, folks have begun to doubt that any of those three will rule the Internet the way they once did.

It’s an amazing turn-about. 2008 year wasn’t, as Sequoia claimed, the death of good times, but the birth of a new, long-lived era of broad and massive revenue growth. The new school of financiers at Sequoia were right about the global economy, which is still a disaster zone outside of Silicon Valley. They were just wrong about how entrepreneurs would react to it.

The climate hasn’t always been so sunny for IPOs. Two years ago, Fred Wilson noticed that companies weren’t going public because of the regulatory environment, noting that “every time I sign a 10K or 10Q, my hand shakes a little.” Bill Gurley wrote that “no one wants to manage a public company.” Both acknowledged that IPOs were still a possible outcome, but not one on which most entrepreneurs should set their sights.

At the time, we acknowledged the risks but worried that the dearth of IPOs was itself less worrisome than the fact that investors of Fred and Bill’s ambition could accept it: “It’s like the PGA moved the Masters to a pitch-and-putt,” we wrote, “and Tiger Woods applauded the decision.” At issue was the size of the opportunity most companies faced, not just their regulatory or management challenges:

How many Web 2.0 companies today have a chance of reaching $100 million in revenues, then $500 million? Maybe we have the next Google, eBay, or Amazon among our ranks now. If so, I doubt the new regulations are enough to deter them from growing into public companies. Characterizing folks who cash out as just smarter or more realistic than those who want to build a stand-alone business seems just as misguided as the 90′s macho insistence on an IPO for its own sake.

Today, in a post titled “Bashing the Collective Wisdom on IPOs,” Fred pursues that theme, describing in detail the rare kind of company that should now consider an IPO: a market-leader with sustainable profits and the ability to grow beyond a billion in revenue. And Bill convincingly makes the case that demand for IPOs is now so great that public investors will pay a premium for new high-technology stocks.

This isn’t by any means a repudiation of their earlier stance, but it certainly reflects a new enthusiasm for IPOs based on improving capital markets, and probably signals broader acceptance among early-stage investors for companies with IPO aspirations.

It’s good to see the IPO begin to make a come-back. Truly disruptive companies often have business models so different from any potential acquiring company’s that no one would buy them anyway except for scrap: Amazon couldn’t have thrived under Barnes & Noble, and Netflix might have gone down with the Blockbuster ship. For the same reasons, Redfin doesn’t want to get bought by Century 21.

Build for the IPO, Even If It’s the Least Likely Event
Hopefully this will change how startups think from day one. In the two years since high-tech IPOs reached their nadir, the conventional wisdom has been that the safe course was to build companies to be acquired. I have seen dozens of startups follow this advice: increasing traffic not revenue, building add-on features rather than their own products, and avoiding hires that wouldn’t be valued by an acquiring company.

Some got bought. Most didn’t.  The ones that didn’t had a glum future: neither investors, management nor the employees were in it for the long haul, and the company hadn’t given much thought to generating enough revenue to become profitable.

The moral of the story is that you can’t show up to a track meet prepared to run a mile, only to find out you’re in a marathon. Rather than building for an acquisition and hoping for an IPO, you have to build for the IPO then accept an acquisition when that’s the outcome that makes sense.

Even if the overwhelming majority of startups will end up getting bought — I don’t think Redfin is in this category — the best way to command a high price is to be self-sustaining and independent, so you can win your market outright and control your own destiny.

Don’t believe me? Just ask Sujal Patel at Isilon, a Madrona investment that never could have commanded a $2.25 billion price from EMC if it hadn’t taken the time to build itself into a great company in its own right. Or ask an old roommate of mine, who once suggested I cut my toenails before a date.

“Why would I do that?” I asked.

“You know,” he said, looking at me uncertainly. “It could be a long night. You just want to be ready for anything.”

This is an important discussion, between two of my favorite people in Silicon Valley, with folks here in Seattle lining up on either side. The differences in fees, fund size and management structure between these investors are important to the endowments and others who entrust their money with venture firms.

But the argument over economics hardly matters to an entrepreneur, who is going to evaluate each investor using different criteria. Negative returns are just another word for high valuations, which entrepreneurs like. Here, for example, are the factors Redfin considered when raising money:

1. Valuation, terms: the less stock you have to sell, the better
2. Prestige of investor: used by recruits and journalists, especially at an early stage, to decide if you’re worth checking out.
3. Board member relationship: can you have a real conversation with the person leading the investment, about what’s really going on?
4. Portfolio: can you learn much from peers running other companies in your investors’ portfolio?
5. Follow-on funds: some investors will bail you out of a jam, some won’t, some are in a jam themselves
6. Board member insight: It’s fashionable now for entrepreneurs to say they only want an investor’s money.  But my experience has been different: Emily Melton persuaded Redfin to focus on search engine optimization, which has accounted for as much as 40% of our traffic. And Paul Goodrich was the first champion of our now-wildly successful partner business. An investor is invested in your business, but he doesn’t report to you. It’s good to have that perspective. And to my own surprise, I have started to question what was once an article of faith, that operational experience is a requirement; two of my favorite investors, Marc Singer and Fred Wilson, have none. If anything,  entrepreneurs initially under-value the importance of the board member they’ll be working with over the next five years.

With that said, I still like watching the fur fly. I get out a bucket of popcorn each night before watching the re-runs of these debates. But I wish the two sides would talk more about what matters to entrepreneurs, and less about what matters to limited partners.

Friedman used to be one of my favorite writers. In Beirut to Jerusalem, when he talked about two sheiks on a flight to the Middle-East tossing bricks of gold back and forth, he was compulsively interesting.

But now that Friedman is back in the U.S., he occasionally seems less like a world-wise foreign correspondent than a credulous, honey-didja-see-that tourist. This article on entrepreneurs is just a bad example. First, he doesn’t bother to talk to actual entrepreneurs. As he himself admits, his essay mostly comes from two academics at non-profit institutions:

I asked two of the best people on this subject, Robert Litan, vice president of research and policy at the Kauffman Foundation, which specializes in innovation, and Curtis Carlson, the chief executive of SRI International, the Silicon Valley-based innovation specialists.

What’s odd about Friedman choice of sources is that he opened the essay by criticizing the Obama administration for being too “heavily staffed by academics, lawyers and political types.” Yet his first source, Robert Litan — a great thinker and writer — is three for three: he worked as an academic, studied law at Yale, and often writes government reports (incidentally, Litan also wrote an essay in the New York Times that prompted us to testify before Congress). The other source, Curtis Carlson, lists his primary avocation as the violin.

True to form, these folks have proposed a new government department of entrepreneurialism, headed by a cabinet-level minister called “Secretary Newco.” Like low-salt Chinese cooking, this sad phrase is a contradiction in terms: what government minister is an entrepreneur?

Friedman briefly mentions an entrepreneur’s visa, which is a worthy goal, but then suggests we offer a visa to any foreign student who graduates from a U.S. college. Regardless of how I may feel about immigration, this is an overly broad, unrealistic suggestion: someone who studies hotel management at UNLV isn’t likely to start a company just because she’s from the Congo or Italy.

Friedman then proposes “cut[ting] the capital gains tax for any profit-making venture start-up from 15 percent to 1 percent.” This is nonsense: a venture-funded startup usually isn’t “profit-making,” and in any event a startup doesn’t pay capital gains taxes. Employees and investors pay capital gains taxes when selling the stock of a company that was, at some point in the past, a startup.

Moreover, the capital gains tax as it stands is not a problem: the most tax-efficient way to become a millionaire is by selling stock in your own company. You pay a lower tax rate on that money than most middle-class Americans. Friedman also calls for lower rates of corporate income tax on startups, even though a startup would only pay taxes once it began making profits. In four years, Redfin has barely paid any corporate income taxes, and now that we sometimes earn money, we don’t mind the tax.

The errors continue, with Friedman riding the old battle-horse to repeal “Sarbanes-Oxley reporting for new companies.” But new companies don’t have a Sarbanes-Oxley reporting requirement. Sarbanes-Oxley only applies to publicly traded businesses, which are usually at least five years old.

Even if Friedman is talking about lifting Sarbanes-Oxley requirements for companies in their first few years as a publicly traded stock, I think he is missing the point. As we’ve argued before, the reason for the dearth of IPOs hasn’t been due to Sarbanes-Oxley laws but because, a few years ago, so few startups were generating consistent profits, and so few entrepreneurs were interested in the long haul.

Finally, Friedman talks about policies that “encourage private investment.” He seems oblivious to the fact that too much money is what’s breaking venture capital right now. We don’t have a shortage of capital, or even a shortage of ideas. We have a shortage of engineers.

And this is precisely where government can help. My alma mater, U.C. Berkeley, has long been one of the principal sources of engineering talent in Silicon Valley. Last year, Berkeley was forced to cut its budget by $813 million, or 20%. Top-flight professors are leaving the nation’s leading public university in droves. The same scene is replaying itself across the U.S., including here in Seattle at the University of Washington.

You would think the whole Valley would be up in arms over such a calamity. I for one wish Friedman would have mentioned undergraduate education somewhere in his essay. Within the technology community, we all know that the reason America is #1 in technology isn’t because of our regulations, cabinet ministers or tax code; it’s because we have had the best universities in the world, which produce the best thinkers, scientists and engineers. We have only recently come to realize how delicate those universities are.

This is why I just can’t bear to hear folks talk about Secretary Newco, cutting the capital gains taxes for millionaires and billionaires, or eliminating the Sarbanes-Oxley regulations that emerged after Enron struck the first of many blows against our faith in public markets. Our once-proud research institutions are struggling to fulfill their mission in society. They need the government’s support. They need Tom Friedman’s support. They need your support.

If we’re going to rally behind a cause, we don’t have to look further than that.

Others will say that it’s another Kelman case for building Death-Star-sized startups rather than operating on a more hand-crafted scale.  This is a bit truer, though I’d like to think that a company can get big without selling its soul. We just believe that the funnest thing in the world is to take something small and make it big. Growing is better than not growing.

And of course being capital efficient is better than dilution, so we’re not trying to persuade anyone to raise money. But even if you don’t take investors’ money — especially if you don’t — it’s useful to take their mindset, at least for the five minutes it takes to read what we learned while raising money from Greylock.

Because no matter how hard I try, I get into the weeds at Redfin and forget to think strategically about what we’re becoming. The process of raising money is an antidote to that tendency. While I sometimes resented having to spend a few weeks on Sand Hill Road explaining our story, by the end of it I had decided it was a good thing to be a little scared while talking to really smart people about basic strategic questions. You have to think everything through all over again, confirm some decisions, reconsider others, and come out ready to execute like a wild animal.

Hopefully we simulated that experience in a way that is useful to you. While writing the essay, I began to reflect on how my attitude had changed about VCs.

I used to think of them as the Wizard of Oz. As a 25-year-old raising money for Plumtree in the ’90′s, I often found myself hyper-ventilating in a rented Ford Festiva parked off Sand Hill Road, saying to myself THIS IS IT, THIS IS THE BIG ONE. Back then, I looked to Greylock or Sequoia as more than just a source of money or good advice, but as the only remaining dispensary of prestige or meaning — a Harvard that could reconsider my application, an Oracle capable of anointing our little startup as The One.

You need someone to look up to. When your first job out of school is at a startup, you stop believing in the 68th-floor executive suite, the older gentleman in the bespoke suit, the whole adult world that seemed so magnificently ordered just a few years before. You’re surrounded by dingbats just like yourself. There is no Star Chamber, only a series of poorly carpeted rooms that you will progress through for the rest of your professional life. By 24, the great chain of being had become so discombobulated for me that I was no longer even sure Coke was better than Safeway Select.

Since then I’ve become more of a humanist in my career, taking comfort in the idea that we can each decide what is meaningful or prestigious for ourselves, that there is no one to believe in or beseech except other well-meaning folks like ourselves.

But I’m still a little puzzled by VCs, who now sometimes seem more like the precogs in “Minority Report,” confined for most of their lives to a sensual-deprivation chamber, lightened at one end by the flickering of an endless PowerPoint preso: formidably gifted, carefully consulted, unsplattered by the muck of Redfin’s everyday reality, and yes, still tinged with my own feelings of reverence. It wouldn’t be a job I’d ever like — I have a bet with Madrona’s Greg Gottesman that I’ll never become a venture capitalist, he doesn’t know much emotion I need to put into and take out of a job —  but even after all the ways I’ve become disillusioned about what not to believe in, it’s a perspective I value a lot.

Photo credits: Neato Coolville on Flickr, Warner Brothers, 20th Century Fox.

We couldn’t be happier about the team behind us. Like all the Greylock partners, James has deep operating experience, having run the gamut from founding a tiny Internet company to leading a multi-hundred-million-dollar business. And even though Greylock has every right to a bad-ass swagger, with probably more publicly traded companies under its belt than any other venture investor, the Greylock people you meet are somehow humble and funny and nerdy while still being terrifyingly impressive. Their first diligence request was a spreadsheet of in-depth Settlers of Catan statistics that we’d prepared for Greylock’s newest partner, the great Reid Hoffman.

We’re a good fit in ways beyond our affinity for Settlers. Time and again, Greylock has invested in cult businesses built with little or no marketing spending that have gone on to become household names — Facebook, Pandora, LinkedIn and, my favorite, ZipCar. Like our other investors, Greylock has the confidence to mentor the talented up-and-comers at Redfin into bigshots, to let Redfin grow as big as it can rather than selling at the first opportunity,  to think different and to think big. And it has high expectations, not just that we can continue to be a nice little business, but that we can become a company that doubles and doubles again.

Already, we’ve got plenty of momentum. Here are some of the past year’s highlights that we included in our funding pitch:

Now the challenge is to keep performing, taking on new risks rather than just consolidating existing gains. For a while now, we’ve been too scared to take many risks. We’ve been profitable since June, but didn’t have much money in the bank, and,as we explained this morning to John Cook, couldn’t think far beyond the month right in front us.

We’ll keep running the business out of the cash register — we worked too hard to get to profits to abandon that discipline now — but the new capital gives us a margin for error when making a few big bets: beyond real estate search, we still have to put the whole touring, offer and escrow process online, and we’ve got to build the systems and processes that allow us to deliver the same amazing service to 10,000 or 100,000 customers every month, not just 100 or 1,000.

For now, we just wanted to thank all the folks who helped us put the round together: Paul Goodrich,  Steve Hall, Marc Singer, Emily Melton and Josh Stein on our board, as well as our excellent attorneys at Fenwick & West, Alan Smith and Matthew Forkner, and finally the folks at Redfin who crunched the numbers and made the pitch: Adam Wiener, Chris Roske, Sasha Aickin, Matt Goyer, Scott Nagel, Michael Young, Angela Cough, Bryan Selner and many others. Thanks to everyone for all your help, and to Greylock for leading the round.

We’re honored by your support, and we”ll work hard to make the most of the opportunity.

1. “Once you have a deal under your belt — whether it’s a $3M deal, a $30M deal, or a $300M deal, you are bankable.  People will bet on you again.” Ideas, not capital, are scarce. Selling a good company so that one you haven’t even thought of yet will be bankable — that is madness. Aaron Patzer — and anyone else in his position — was bankable well before he sold his company.

2. “And for the young entrepreneur — particularly those under 30 who’ve never done it before — the single best thing you can do to ensure your future success is TO GET A DEAL DONE.” Saying it is especially good for young entrepreneurs to sell their company is especially wrong. Entrepreneurs “who’ve never done it before” don’t need a farm system, or training wheels, or a practice run. Almost every great company (Amazon, Apple, Dell, Ebay, Google, Microsoft, Oracle, Yahoo!, PayPal, Facebook) was started by someone 30 or under. Your best idea usually comes before you’re 30.  Your ability to take risks is highest before you’re 30. In my experience, second-timers have a higher success rate because they are pragmatic and savvy about building a company for an exit, but the magnitude of success is highest among first-timers. If first-timers don’t create public companies, nobody will.

3. “Playing well sometimes means you take a single or a double instead of getting thrown out trying to steal home.” This talk of “swinging for the fences” and “striking out” or “getting thrown out at home” seems like a scare tactic. The difference between software and baseball is that you can swing for the fences and miss, and then just go back to second base. With the exception of Pointcast in 1997, which startup has gotten to the point where a lucrative acquisition is possible, decided to try building the business further, only to discover that there is no longer an exit at all? The company I co-founded, Plumtree Software, turned down seven acquisition offers before going public and accepting our eighth offer. What once made it hard for young people to hold out was their need for cash, but now most successful companies give the founders an opportunity to sell part of their stake early.

4. “Why is it that no one seems to think switching jobs every 3-5 years is a bad thing, but somehow think that selling your business to someone who really wants it and will grow it isn’t terrific?” Selling your business and switching jobs are totally different; anyone who has started a company knows that; you know that.  The idea that every entrepreneur is a serial entrepreneur, who can think of a new startup as easily as getting a gallon of milk from the store or finding a job at Kinkos, is a fiction we use to persuade ourselves that we’ll easily get another shot at greatness. It isn’t that simple. Ask Max Levchin, who seems to have gone through a Great Night of the Soul before founding a maker of Facebook applications, Slide. Just ask Aaron Patzer in five years. I don’t know Aaron and certainly wouldn’t want to bet against him, but if he makes as much money or has as much fun building his next startup as he did this one, he will have beaten some major odds. If I had been his adviser, I’d have helped him do whatever he wants — just as you did — but I also would have told him to keep having fun if he still believed in Mint. I think entrepreneurs need to hear that, too (for the record, I love Redfin as much as Plumtree, and Redfin may get bigger than Plumtree too, but this was a lucky break).

5. “More transactions of any kind or size help improve overall startup ecosystem health.” It is an interesting argument that small-scale transactions create liquidity and transparency, but surely public companies do that best. More to the point, Google, Microsoft and Amazon can’t buy every startup, particularly since many of their recent acquisitions haven’t been accretive. Without new venture-backed companies maturing into public companies, the total amount of capital available to fund innovation will decrease.

And the rest I agree with. It is outrageous baloney that anyone pressured Aaron Patzer to sell Mint. And there are plenty of startups that should sell when they can, for reasons both rational and admirable. But telling young entrepreneurs that they’re not ready to be a Jedi yet, just because they’re young — that just isn’t the Dave I know and love…

Update: a comment notes that the original Jason Fried essay never said that Aaron Patzer was pressured or forced into selling Mint. Jason just said that there’s an environment that made it easier for Aaron Patzer to sell, a point to which I am at least sympathetic. Jason, I just read your essay more carefully, and see that this comment is correct.  If you read what we’ve written earlier on the topic, you’ll see that we agree even more than I had originally realized.

And we share some of her concerns. A few weeks ago, we wrote that “the money in the start-up economy today is like the water in a hose whose faucet was just turned off,” with investors in venture funds at one end of the hose, and startups at the other. Last September, we argued that what was really scary about the lack of public offerings or even accretive acquisitions was that nobody was scared.

But in some ways we are more hopeful now than Sarah. The 50% drop that Sarah takes as the starting point for her argument that venture capitalists are “falling off a cliff” is worrisome for startups looking for good valuations, but not necessarily worrisome for venture capitalists. The drop in dollars invested reflects a few trends that Sarah doesn’t account for:

1. Most startups this winter suffered a major dip in revenues as businesses and consumers stopped spending, and ad rates plummeted through the floor. As an entrepreneur, the last thing you want to do while your P&L is getting trashed is raise money. Every CEO I know who was considering raising a round put it off unless there was no way to avoid it. The only companies that were raising capital were the ones who had no choice.
2. Valuations were much lower, so dollars invested were lower too. But no venture capitalist objects to getting a good price. You don’t judge a trip to the grocery by what you spent, but by what you got. So a better measure of the VC industry would be the number of deals done, and the amount of equity purchased.

And this is where Sarah’s essay didn’t ring true, at least for me. The VCs I know are as interested as ever in deal flow, and eager for a big hit. They still have plenty of capital to deploy, and happily anticipate fire-sale valuations. (Update: Bernard Lunn at Read-Write-Web has the same observations based on first-hand interviews with VCs and entrepreneurs.)

The reason I write this is not to defend venture capitalists: there may well be too many venture firms, with bloated fund sizes driven by management fees rather than returns. But just as it was crazy for venture funds to measure themselves by the dollar volume of their funds rather than the amount of money they could really put to work, so now it’s crazy for Sarah to judge the venture industry by the dollar volume of its investments.

In fact, rather than seeing this decline as the problem in venture capital, I think it’s the solution. Less money more selectively invested into high-quality companies will lead to better returns.

So where are all the high-quality companies? That’s the real question behind Sarah’s essay. When she says there is “no obvious high-growth sector of the tech economy,” what she is really saying is not simply that there are too many venture capitalists but there’s nothing left for them to invest in.

Reading all the media coverage this week about Ashton Kutcher and Oprah Winfrey on Twitter, it would be easy to believe we’re at the end of our days. But last I checked, the global economy collapsed because we didn’t have the right information about what financial assets were worth. Doctors still have no way to know what treatments a patient received before showing up in their office, and the human genome has become too complicated for the current generation of computers to track. In our corner of the world, real estate is still pretty screwed up too. Business as usual won’t solve these problems. Startups armed with new technologies will.

The challenge will be focusing our time, energy and money on these important problems, which so far the Web 2.0 movement hasn’t always cared about as much as kicking the crap out of one moribund industry, newspapers, over and over again.

We talk about the dot-com era as our greatest folly in Silicon Valley. But at least back then, startups tried to do something big: criss-crossing the country with Internet fiber, putting a computer on every office desk and in every house, changing how consumer bought almost everything and how businesses manufactured almost everything, too.

If we get back to the big stuff, the world will be a lot better, and VCs will do just fine.

(Photo credit: Bikeracer on Flickr)

When I first got involved in raising money for my last employer, Plumtree, I looked at a venture capitalist the way Wiley E. Coyote looked at the Roadrunner, as a mirage of drumsticks and chicken wings, garnished with a sprig of parsley. Assessing an investor for his advisory ability seemed like asking about a heart surgeon’s personality before getting a triple bypass; it was hard to think beyond the cash we needed for our survival.

Ten years later, raising money for Redfin has often still been a gambit — our last effort was in 2007, and it wasn’t as easy as we thought it would be — but what made it easier was that we had convinced ourselves we really were evaluating each investor too.

Of course, it isn’t always possible to choose your investors. Beggars can’t be choosers, and all of us unprofitable companies are beggars. But my point is that approaching money-raising as a choice actually makes you a better beggar. Nobody likes being sold to, but everybody likes being chosen.

I still read tweets and blogs about how to make a VC moan with pleasure or lose his mind or do whatever he is supposed to do, but a VC relationship is more of a marriage than a one-night stand. Yes, you need a mission statement that fits on the back of a business card, a snapshot of your financials and the blue-bottle magic of an insanely great demo — which I have to admit should have the intensity, the lack of antecedent, the awkardness and brevity of teenage sex.

But after that it seems obvious that you just want to have a conversation about the business. PowerPoint, an evil system of command and control that turns one person into an unstoppable bore and the rest of us into zombies, is responsible for billions of dollars in lost valuations.

And if you aren’t asking as many questions as the investors are, you can fall into becoming a performing monkey, skimpering down Sand Hill Road from one meeting to the next with the same song and dance. Ideally, raising money is more like traveling to alien planets in a densely clustered solar system, where you encounter very smart creatures who have no idea what your world is like, but ask you questions that make you wish it were better.

It has been so long since Redfin has raised money that I worry we’ve lost touch with an important source of ideas and information. I still remember the questions from last time: why doesn’t Redfin charge users for premium access? Have you looked at how Yelp encourages users to compliment one another’s reviews? Why aren’t you offering mortgages? I try to answer every question with “yes,” “no,” a number, or “I don’t know.” For the best questions, the answer is usually “I don’t know.”

But you also need to have questions of your own. Here are some of my faves:

1. How do you see our market changing over the next few years? Your investor has to develop her own ideas about your business sooner or later. At this early stage, this question is mostly an IQ test.
2. When times have gotten tough for your portfolio companies, how have you helped them out? Anybody can get lucky with an investment that takes off like a rocket; all you have to do is hang on for dear life. A VC’s true measure is how she gets all her other companies pointed in the right direction.
3. Who are your favorite entrepreneurs? Some people genuinely like entrepreneurs, notwithstanding their volatility and constant intellectual jousting. Most people fake it. If the investors’ fave five is composed of people she hasn’t worked with, she’s faking it.

It’s a fun process. Yes, when really smart people get to know everything about you in a very workmanlike way and then pass by the dozen, it becomes a self-esteem destruction machine. But mostly, it’s fun. Every entrepreneur I know secretly loves the WSoP-stakes game of raising money: the marbled lobbies and green courtyards, the bountiful assistants bearing glasses of ice-water are so much nicer than our grubby little offices.

What I don’t understand is why entrepreneurs only love venture capitalists until they give us money. As someone who always hated rich people and people in authority, I remember as a younger co-founder being shocked at how the grown-ups at Plumtree spoke respectfully of our board. I kept waiting for them to take off the rubber masks of their own faces and say, “just kidding, we hate them too.” So maybe now you’re waiting for me take off my rubber mask.

But back then, I just wanted to build good software and market it straight down the world’s throat. Now that I feel responsibility for other parts of the business, I need more help. This fall, despondent about our layoff, I really needed help.

Sooner or later, you will too. You’ll feel all alone in whatever you’re trying to do, and you’ll need advice. If you’re really in a jam, you won’t even be able to ask normal people for advice, because the situation is so bad you don’t want anyone to know about it. Your friends will listen to your better-than-it-really-is situation assessment while browsing the web or yelling at their kids, and then tell you what you want to hear: that the situation is better than it really is, that your board is wrong and you are right. If you already know what to do and just haven’t done it yet, this feels great. If not, it makes you feel more alone.

This is why it’s a good idea to at least try to choose your VCs, instead of just begging to be chosen by them. I almost didn’t write anything about recruiting and choosing VCs because I am so bad at talking to them — at a climactic meeting with an entire firm a few years ago, I opened the presentation by asking if the firm had ever made any Seattle investments, whereupon a senior partner gently reminded me that he was the first venture capitalist to invest in Microsoft — but the one real lesson I’ve been able to glean from the whole experience is that being a better chooser makes you a better beggar.

(photo credit: D.James | Darren J. Ryan)