What kind of bugs me is why the small start-ups who are actually making money from day one don't really receive much money. I mean, $700,000 (pulled from thin air) in funding is good, don't get me wrong - but if they're making money and they have a decent business plan, why aren't THEY receiving $41,000,000 in funding?
Perceived addressable market or size of opportunity.
VCs tend to care principally about how big it could get, to the exclusion of other potentially important principles.
A good counter-example to Color is actually Bingo Card Creator.
It's a great product, very well managed and fine-tuned by patio11, but it has a pretty rigid ceiling on its opportunity.
VCs avoid businesses that seem limited or overly niche so as to create a limited maximal market opportunity.
Another contrast would be anything in the ad business. It's such a huge business that a lot of startups that go into the ad industry end up making a sizeable amount of money fairly early on.
VCs tend to be keen on advertising startups that want to build a large platform or catch-all service that all the buyers/content providers will want to use. Nevertheless, they'll still invest in smaller scope ad startups that have an opportunity to expand.
Because if they already have revenue, they have numbers around who and how many people are willing to pay -- there's at least something to go on and they get valued like any other company. Investors start with that and calculate forward how much they'd be willing to pay for future revenue and growth.
The start-ups with no revenue don't have that, so they make guesses about what their market can or will be, which is often over inflated and rarely accurate, but nevertheless is the basis for how much people invest. Investors in this scenario take those numbers and then back into what they think the value should be. Or worse, they compare it to other hyper-inflated companies and arrive at a valuation via group-think.
