It is now possible and desirable to build small pieces of valuable software and distribute them widely over the Web. How the software works with other related software is crucailly important determinant of success. Traditional marketing, channel management and enterprise software development processes are irrelevant in the early-stage.
How do VCs fund this type of business. The answer is that they don’t. VCs stick to either the more traditional enterprise software businesses (for which there has been a great exit market in recent years) or only invest after the software has gained traction with users.
Advice to entrepreneurs – pare down your software such that it provides a minimum value to users then launch it to early-adopters. Work hard to interact with early-adopters, learn from their feedback and carry on developing incrementally until the user base is singing its praises. Once at this stage think about how to fund the business. Up until that point you need to fund it yourself – importantly though, doing so is no longer an expensive task unless you are trying to do too much.