Yesterday, Erick at TechCrunch asks if we’ve reached The End Of Venture Capital As We Know It? as a result of this painful economic downturn.  While Erick’s post is rather dire for the VC community, he makes this note about startups:

“Startups can be run so cheaply now (with open-source software, cloud computing, and virtual teams spread across the Web) that many more can achieve profitability without any VC cash. Up until recently, they still happily took that cash when it was handed to them. But certain classes of startups, especially Web startups, may now find they don’t even need that money.”

He was inspired by Paul’s comment:

“Imagine what it would do to the VC business if the next hot company didn’t take VC at all.”

On the same day, Seth wrote Building An Albatross.  In it he shares an update on the 3 year anniversary of that day we helped Squidoo launch into alpha.  He included this appealing graph:

It was about this time last year that Seth wrote about Squidoo becoming profitable — without any VC funding.  So, how have they done it?  In my interpretation, Seth points to two factors:

1. Business Idea - If you’re lucky, your business idea will be one that can grow almost exclusively based on word-of-mouth, and gets better as it does so.  “Success breeds success” and “the more it gets used, the better it works,” as Seth puts it.  Every business works this way to some extent (e.g., at Viget we’ve grown almost entirely based on happy clients talking with prospective clients), but online “products” like Squidoo, Facebook, and Twitter have this concept baked into the idea — they live-and-die by it.

2. Business Approach - Regardless of your business idea, you have to determine the approach you’re going to take to managing the flow of money.  As Seth points out:

“You need to either raise enough money from patient investors to stick it out… or, as in [Squidoo’s] case, be so lean and efficient that the cost of lasting long enough to make it profitable is one you can handle.” 

In some businesses, the lean approach is a no-brainer.  We never raised any funding for Viget — it’s rare that doing so makes sense for a services company, outside of a typical business loan to get started.  As a result, at Viget we like to say “we’ve been profitable every month because we don’t have any other choice.”  We’ve been pragmatic about spending (i.e., “lean”) from Day One, and still operate that way. 

The approach is simple: make more money than you spend.  Every day.  If you’re fortunate enough to get ahead on earnings, invest them into the business and grow it.  Repeat.  If things go right, over the years you’ll become more profitable and have a company that has real value.  This is the way it’s worked since the dawn of time — it’s the eternal business approach.

Of course, it’s not that easy.  Building a web product these days doesn’t always require VC funding, but it’s not free either — especially if you and your co-founder don’t happen to be a great designer/developer team.  Most concepts still need some kind of funding to get going, and that’s fine.  As the economy improves early-stage investors will get more comfortable again — they might even if the economy languishes.  The amount of capital needed will continue to depend on the compexity of the concept.

At a time when TechCrunch has gone from tracking all the great news of startup funding and successful exits to covering layoffs and shutdowns, Squidoo just keeps on flying along.  Fitting, then, that Seth takes the albatross metaphor to show why Squidoo has worked after Mike used it years ago to predict Squidoo’s failure.  As Seth points out, Squidoo still has a long way to go — but the approach they’ve applied is clearly one designed for the a long-haul.