What do you get when you combine 7 panelist plus one moderator on to a stage for 30 minutes to talk about a serious topic? Answer: Not much. And that was evident on today’s Angel vs. VC panel.It’s a shame. There are real changes in the venture capital industry and it would have been fun to talk about them. I said almost nothing in the 30 minutes.
My friend Ethan Anderson put it best to me after the panel, “You probably shouldn’t have been up there. There was a fight going on and it’s clear that you were neutral and didn’t have a dog in the fight. Maybe you should have moderated, but that’s likely why the panel went how it did.” I think that’s about right. Perhaps I shouldn’t have pushed to be on the panel in the first place.
If given a chance here’s what I would have talked about:
1. The VC industry is segmenting – I have spoken about this many times before. The VC industry has different segments in it that have different fund sizes, different investment amounts and different risk / return expectations. That’s a good thing. I wrote about it here (mostly starting at point 7) and Chris Dixon wrote a great post about it here. We need people at all stages of the funding lifecycle and not just VCs. We need venture debt, factoring companies and public markets.
2. Industry change allows the entry of newer players at earlier stages – It doesn’t take as much money to launch a startup anymore. We all know that. You have an open source stack, cloud services for storage, processing & management and APIs for just about anything you want. So what took me $2 million at my first company now takes $20,000. So in the past we needed VC to really get a startup going. These days that’s not the case and it’s a great outcome for entrepreneurs and for innovation. A new group of investors have clustered around writing earlier-stage, smaller checks. That’s awesome. And people like Jeff Clavier, Aydin Senkut, Dave McClure, Chris Sacca & Eric Paley (at Founder Collective) are leading the charge.
3. There is no such thing as a super angel, only “micro VCs” – Ron Conway said what I had been preparing to say, “there’s no such thing as a super angel.” Either you’re an angel or you manage professional funds. Period. If you’re an angel you invest your own money and you have nobody to answer to except your spouse. And you can have ulterior motives like helping people or being involved with “cool stuff.” If you’re investing other people’s money you’re a professional money manager. If you invest it in startups you’re a VC professional money manager. Now we can call you a seed-stage VC or a micro VC. We can even acknowledge that you might work differently than traditional VCs. But you’re not an angel. So I wish this separate definition would go away. Stop to think about it, why would a super angel act more like an angel than a VC? A: Only because it’s a nicer branding for entrepreneurs. That’s all. You still have a fiduciary responsibility to your investors (LPs) to maximize returns.
4. Some companies should raise less money and consider early exits – We had a discussion about whether companies should raise less money and have smaller goals for an exit. Dave McClure argued passionately that since the overwhelming majority of exits are sub $100 million we need to readjust how much capital goes in. Chris Sacca talked about how a $20 million exit can change a founder’s life and that shouldn’t be scoffed at. I totally agree and have been arguing this to entrepreneurs for years. I used an analogy I heard from Michael Dougherty (founder of Jelli) recounting what First Round Capital told him, “sometimes you’re on the local train and sometimes you’re on the express train. The express train might get you there faster but there are no options to get off along the way. The express train represents raising a large VC round before you’ve figured out whether you can be big.” I agree. I always counsel young entrepreneurs to start on the local train. You can always upgrade if you sense that you’re on to something big.
5. Others should swing for the fences – Some companies are designed to be big, industry changing plays. It’s nice to see entrepreneurs who still dream of doing big things. That doesn’t mean raising huge sums up front but when you’re on to something then you step on the gas. I would never go into an investment where the entrepreneur was talking about a $20 million exit up front. That may be a great return for him/her but for a venture investor it’s not. That person would be better off raising angel money or no money. And that’s honestly OK. It’s just not a VC investment.
7. Outsized returns are produced by having a few big winners. You can’t average your way into VC success – Dave McClure talks with such disdain about venture capitalists that I think he misses the broader point. I understand why he wants to differentiate himself but I wonder if a scorched Earth strategy against the main funding source for your company pays in the long run. What micro VCs need to consider is what happens when several of your companies want to grow and require VC financing? Or when the economy turns downward and they all need financing extensions? You might be able to get several $20-50 million exits in a good exit environment but I doubt that will drive outsized returns and cover all of the busts. In most funds the outsized winners return the fund (or a large portions of it) and if you get a few of these you’re doing really well. When I look through our own returns across our many funds it has always played out this way. Our biggest winner from our last fund returned a total of $320 million to our investors across two funds. You can’t average yourself into VC success. You have some big winners and some losers. And I think that’s what Michael Arrington was getting at when he was pointing out Sequoia’s $12 billion in exits in the past few years.
6. In my heart I believe in ‘founder liquidity’ and always will – I have written about this extensively so if you want a deeper dive it is in my post on “The Entrepreneur’s Thesis” or “Should Founders be Able to Take Money off the Table?” I was a founder once. I had two kids and a rental house. My wife worked at Google so while we had good income in Silicon Valley it’s hardly the life of luxury given the costs of housing. And then you think about these millionaire VCs flying private jets, kids in private schools and vacationing in exotic locations talking about swinging for the fences. It is such a disconnect. If the company is moderately successful, growing and has great prospects for the future than a small liquidity event will help founders & venture capitalists to be aligned. The hardest thing is deciding what the right time to allow founder liquidity is. I discussed it in my post on the topic linked above.
** One small note: many VCs who got into the industry in 2001 or later have never seen a “carry” check. So many of the younger VCs who weren’t part of the heyday (late 90′s) and who weren’t successful entrepreneurs first have never had big liquidity. It’s just worth pointing that out. I think most entrepreneurs don’t realize this.
8. Price creep hurts investors. But it also hurts entrepreneurs – Mike asked people about what they were doing to keep prices down. It was obviously a joke and a reference to the supposed Bin 38 meeting. There is no way for people to keep prices down – it’s a competitive market. This is evidenced by the current price creep that we’re experiencing for early-stage deals. The only solution as an investor is to sit the market out as Chris Sacca said he’s inclined to do. At GRP we sat out 2007 and much of 2008 for that reason and we’re now looking pretty smart for doing so. We picked up activity aggressively in 2009. In public investing you can get in and out even in a bull market. VC is different.
What I wanted to say, but Michael cut me off (hey, it’s his show!) was – it can actually be a problem for entrepreneurs to raise at too high of a price. We saw this with VC backed companies in 07/08. They raised at $40 million pre-money for pre-revenue companies and when the economy corrected it became hard for them to refinance themselves. You have to be careful about “getting ahead of yourself” or you make the next financing more difficult. If you do a $1 million angel round at $6 million pre-money and hope to do a Series A round for $2-3 million that’s fine as long as you’re doing awesome against your metric goals and the market continues to be frothy. If either condition doesn’t hold it will be hard to do anything but a flat or down round. I leave it to every entrepreneur to decide but just go in armed with the thought exercise about a multi-stage investment process over time and under different market conditions.
And finally, one non VC topic.
9. Panels stink – I’ve written twice about sitting on panels and how to make the most of it. They are here and here. It basically boils down to: educate, entertain, have a dialog, don’t be boring and don’t sit on large panels (doh!). But I wrote about one other point that I wrote back in March 2010 so it’s clear I didn’t just dream this up after today’s panel. But I certainly could have written it about today. Succeeding on a panel is about pleasing the audience AND your fellow panel members (at least the ones you respect / like). No prizes for guessing who I’m talking about here (yes, I was annoyed). So here it is, your moment of zen, from March 2010 …
“Hogging minutes – The other annoying thing on panels is the “over talker” or the person who always has to answer the question first (the way that annoying kid did back when you were in elementary and high school). Don’t be a wall flower – you should get in your minutes. But don’t crowd out other people. If your goal is to sit on panels with important people and build a relationship with them you won’t achieve this by not letting them speak! (you might think you won’t do this either by being controversial – I think if you learn to do controversy with humor and tact it’s OK. Just my view.) Also, when it’s your turn to speak don’t speak for too long in any one question. People prefer snappy answers to questions.”
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(Cross-posted @ Both Sides of the Table)