A lot of bloggers have claimed in recent days that Google's acquisition of Writely signals the demise of venture capital. This viewpoint couldn't be further from the truth. Google's acquisition of Writely, an online document creation and sharing service created by Upstartle LLC, for a reported $7 million is as much about recruitment as product expansion.

Upstartle was a four-person project that never raised venture capital. It was launched by engineers more interested in building a product than a company. That's fantastic for them and Writely's users, but great venture capitalists back companies, not products. Writely is a product but Upstartle is not a company (at least one that an ambitious venture capitalist should back). This explains why great venture capitalists are not overly concerned about the slew of Web 2.0 acquisitions announced in the past six months since most of the acquisition targets are not trying to create companies with sustainable points of differentiation.

Still, the investors operating at the small and early end of the market are monitoring the situation. A $100 million fund is much more interested in a capital efficient startup that could end up being worth $30 million to Yahoo! or Google in twelve months than a $400 million fund is. Bill Burnham and Fred Wilson highlight this dichotomy among venture capital funds in their recent posts.

The phenomenon of small engineering teams (I'm hesitant to even call them startups or companies) being purchased is not new. And with the costs associated with launching a project dropping, it won't disappear anytime soon. But, what it won't ever do is kill venture capital. The best venture capitalists will continue swinging for the fences. They would be far more likely to invest in a company founded by an entrepreneur focused on building a $700 million company than consider backing an entrepreneur satisfied with a $7 million business. — Joshua Jaffe

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