Ford Motors dominated the auto market in the early 20th century with a single car model, the Model T.  At the time, customers were seeking low-cost, functional cars, and were satisfied by an extremely standardized product (Ford famously quipped that “customers can choose it in any color, as long as it’s black”).

But as technology improved and serious competitors emerged, customers began wanting cars that were tailored to their specific needs and desires. The basis of competition shifted from price and basic functionality to ”style, power, and prestige“. General Motors surpassed Ford by capitalizing on this desire for segmentation. They created Cadillacs for wealthy older folks, Pontiacs for hipsters, and so on.

Today, the venture financing industry is going through a similar segmentation process. Venture capital has only existed in its modern form for about 35 years.  In the early days there were relatively few VCs. Entrepreneurs were happy simply getting money and general business guidance.  Today, there is a surplus of venture capital and entrepreneurs have become increasingly savvy “shoppers.”  As a result, competition amongst venture financiers has increased and their “customers” (entrepreneurs) have flocked to more specialized “products.”

A reader asks:  My co-founder and I have been talking to some VC firms on Sand Hill Road, and I think we’re pretty close to getting at least one term sheet.  I read your post a few weeks ago about how one of the common mistakes startups make dealing with VC’s is focusing too much on valuation.  You also mentioned there are other important terms that affect the economics of a financing, including the size of the option pool.  Can you please explain that?  Our company never issued any options – and my co-founder and I each own 50 percent of the shares.  Will the VC firms require an option pool? And, if so, how will that affect us?

Answer: The issuance of stock options by startups is quite common, because it gives key employees an opportunity to benefit directly from any increase in the company’s value, but doesn’t require any cash outlays by the company.  That makes them an important tool to attract talented staffers.

The first question most people seem to ask when contemplating a new startup is where they will get the money.

That’s certainly a valid question, but all the money in the world won’t make your business a success if you hate what you are doing, and you aren’t prepared to do the job. I suggest that there are several other questions even more important than the money one.

The best way to assure the success of your startup is to do something you love, as opposed to something that will make you a lot of money. Of course, all these things and many more are critical, so it’s important that you keep your priorities straight. Here are the right questions to ask yourself, in the right order, before asking others about money:

1. Do you understand and aspire to entrepreneur lifestyle? Being a startup founder is not a job, but a lifestyle, like getting married versus staying single. In fact, it’s more like being single, since founders usually have no one to lean on, no one to make decisions for them, no one to blame, and no vision to follow but their own.
2. Do you have a passion for your idea and business opportunity? There is no joy in starting a business, if you can’t stand the people, business climate, or the day-to-day responsibilities of the job. Some people relate to service businesses, while others are more comfortable with manufacturing or construction.

Coming off the TechCrunch Disrupt conference this week, one of the interviews that sticks out most in my mind was that of Yuri Milner, CEO of the Russian Internet holding company Digital Sky Technologies, by veteran TV host Charlie Rose. Milner has quickly made a name for himself by investing hundreds of millions of dollars in hot tech properties Facebook, Zynga and Groupon. But it didn’t seem like Milner had any sort of overarching philosophy, agenda or insight into the technology market.

German Internet entrepreneurs have a new friend — Hanse Ventures, a Hamburg-based Internet incubator that has been co-founded by Jochen MaaB, founder of Internet marketing firm, artaxo and Sarik Weber, formerly of XING and co-founder of Cellity. The founding share holders of the new investment group are publishing house Gruner+Jahr’s Chairman Dr. Bernd Kundrun and Rolf Schmidt-Holtz, CEO of Sony Music Entertainment.

The relationship between an entrepreneur and a venture capitalist can be enormously rewarding (monetarily and emotionally).  It can also be incredibly painful, costly and aggravating.

A few months ago at the NY Entrepreneur Week, I presented what I called the Funding Bill of Rights (FBR).  The purpose was to set a framework for a very direct dialogue between entrepreneurs and VC’s that would enable a successful relationship.  After 13 years as a VC, I have discovered (sometimes painfully) that the sooner you talk about sensitive issues, the better and more successful the relationship can be.

I've recently finished reading Rework from the guys at 37Signals and one phrase from the book stuck with me. It basically says you don't want to be a "start-up". You want to be a "business". Super simple statement and I couldn't agree more.

So why are we no longer funding start-ups? Well, to be honest, you don't make much money funding start-ups. Start-ups are more concerned about being cool and hyped than being profitable. Start-ups are more about "fun" than they are about "being businesses" and MAKING CASH! It's more important at many start-ups to bring your dog to the office than it is to bring in a new customer. Finally, many more start-ups fail than do real businesses. Basically, we're not changing much in terms of our strategy. We've always been funding businesses but at times, a start-up slipped in, disguised as a business. We screw up too.