Another important thing to realise venture capital is only appropriate at a certain lifestage of a company where the founders are keen to grow at extrodinary rates in a short time. Not having expectations of growing a startup to Facebook, Google or Bebo size you are going to be wasting a VC's time. This is no mean feat - you have to be mentally prepared to grow and scale a company like mad and similarly your startup must have proved its case for being able to scale.

Whats the best way to know if your startup is ready? build a prototype, get some traction, look at the numbers, measure, experiment then measure again. If you truly are going to scale (and you are growing at 1% a day) and you've experimented enough that you've found a suitable path you'll end up needing money of the VC scale.

It doesn't cost much to sit around and build something. Go and test it - figure out what people want first - change your assumptions and above all PROVE that if you scaled your site it'd be worth it for investors. You don't need VC yet to start something and test it out - If it comes to that point well thats something to think about.

I'm reminded of the story Michael Birch of Bebo tells - they built something, put it out there off the traffic of birthday alarm and experimented with features. Every time a feature added to the growth of the site and got a noticeable increase in users they kept it and tried something else which also contributed to the growth. By experimenting, measuring and then iterating for things which correlated for growth they ended up on the right path. When they had 5 million users and were growing month on month they had the numbers to prove themselves. They took $15m from Benchmark capital. The bottom line - you'll know when you are ready: just go prove the numbers.

While I agree that VC funding is not necessarily required to spark a startup, I do however believe that it can serve wonders in terms of building connections and publicity. Prominent bloggers, such as Michael Arrington and Peter Cashmore, hunt for news relating to startup fundings. Moreover, a VC firm brings high level connections from people with real experience in this game (Vinod Khosla, Ram Shriram, etc).

Almost all sufficiently large startups eventually require Venture Capitalists. So there is no hard and fast rule on this; just take the money when it makes sense.

True. And to clarify my comment, it is also a _slow_ way of growing in many cases. I've just seen so many people willing to burn through other peoples' money without a thought that the idea often appeals to me.

The real principle here is the golden rule of spending money- no matter what the source is: put yourself in the investor's shoes (even if there isn't one). Pretend it's your $10,000 or $5mil and you're investing in a company that you have little control over- would you be pleased with how it is spent?