Wednesday, July 05, 2006

Raising money for an internet startup #2








Talking to the angels.

Should VC firms take the occasional angel plunge?

Is the internet ‘seed’ VC as we know it, dying off and will angels rule?

The phone calls and in person meetings start.

Brad and I set up a list of potential investors. About 50 total, from our respective contact lists. He sent out an intro email to his, and I sent one out to mine.

We keep a Google Spreadsheet (so either of us can access it anytime from anywhere) that lists everyone, tracks contact dates, latest contacts, actions, interest, total raised, amount still needed and misc. notes.

Over the last two weeks, I've talked to a about a dozen people. A couple of not now’s, but most are interested and will 'get back' with us. Cool. To be expected.

All of them were really interesting, really smart and nice folks. People I'd want to go out to dinner with! Quite different than the VC world we'd dabbled in earlier. (One exception.. this person acted like a silicon valley VC.. barely looked at me, just sort of looked out into space the whole time, acted bored, slight air of arrogance- there's always one I suppose).

Also very different from Corporate America where one in 20 or 30 people I worked with were people I would want to hang out with. I remember interviewing at Microsoft back in the early 90's and thinking at the end of the day that not one of these people would I want to hang out with or spend an evening out on the town with (50% of why I turned down the offers. The constant rain in Seattle was the other 50%.. once a Coloradoan.. well, you're stuck. Gotta have that sun!). I also recently read that corporations, especially the big ones, attract a higher percentage of psychopaths and... hmmm.. I digress....

VC's as Angel Investors?

One interesting thing of note did happen. Another local VC that I'd talked to a few weeks earlier (they had read some articles the local press has done on us and wanted to say hello) decided that they might want to participate in the angel round.

A VC firm doing Angel investing! What a concept! I thought: well, there's hope yet. The VC I met with was great. He was a normal guy. No airs. No going through the motions. Genuinely interested. A breath of fresh air.

But it wasn't to be. The amount was 'a few hundred thousand dollars'. (about 1/10th what they'd normally do). His partners (?.. someone.. not sure who exactly) looked at it in a way very similar to how all the other VC's looked at us several months ago. They looked at the 'risk' (high: we're early stage), they did an analysis of the competitors (we don't really have any for our target market.. yet, but they didn't hear that, or didn't believe it) and in the end they just couldn't bring themselves to do it.

I get it. If you have $100M (of which you take, 2-3% of a year to 'manage' plus 20% of profits earned) it's hard to invest less than $3-5million at a pop. You can only manage so many deals. And you have to justify that big hunk o cash you take out each year for management fees. And you MUST manage risk and have a few big hits.

And they couldn't do it even with a business that's got one of the best VC's around putting his own personal money into the company, a great team, a year of successful growth, a pipeline of business, customers and signed contracts (but, granted, no real money yet) all lined up. We're not a sure thing, no doubt, but as seed/angel early stage companies go, we're pretty nicely positioned.

I just don't get the us of the term 'venture' capital. According to Princeton University’s online dictionary, Venture means:

any venturesome undertaking especially one with an uncertain outcome

Right, uncertain outcome. Risk.

That's what Venture Capital means right? Uncertain outcome. Risk.

With the low cost of doing an internet startup now, I have to wonder if what Brad's doing by leading an angel round isn't just his usual angel activity but is really a precursor to the true future of internet VC type activity. The VC's that figure this out, I suspect, will do well.

Here's a link to an interesting post by a VC (Paul Kedrosky) who I haven't met, but who's blog I read:

The Seed (Venture Investing) Rules

He says:

The following figure (click above link to see this- SGC) self-summarizes venture guy Vinod Khosla's investment returns by amount invested, and then stratified by whether he had a board seat. The upshot: His highest returns came disproportionately from investments where he put in less than $1m, and from where he had a board seat.

I think this is going to be true more and more as VC's who invest in internet related businesses dive into things. Can they turn this into a sustainable investment model? Maybe.

It means people that put money into venture funds will have to learn to accept a different model (and set of returns) though.

Or, it might mean that Angel networks replace VC's in the early stage and seed rounds of startups. At least, for a few years. I suspect the VC's, current or next generation, will eventually figure out how to do it in a way that Limited Partners, the people who fund their firms, can get those 50% annual returns. However, based on what I've seen of the majority of VC's out there today, it'll take awhile, if it happens at all. And it'll be a small percentage of existing VC's (like Brad and folks that think like him) that actually make the hard (and smart) choice to do it.

But hey, that's just my opinion. I could be wrong.


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