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The Real VCs of Silicon Valley?

Posted on Monday, Apr 7th 2008

Venturebeat reports that Foundation Capital has raised a $750 Million new fund. The firm’s last fund was $525 million, closed two years ago. Goes back to my question: Who are the real VCs of Silicon Valley? How can you practice true venture capital if you have to put so much money to work?

Don Dodge provides the statistics: “The Center for Venture Research at UNH today released their annual Angel Capital report for 2007. Angels invested $26 Billion in 57,120 companies, up slightly from last year. The report says there are 258,200 active angel investors in the USA. By comparison, Venture Capitalists invested to $29.4B in 3,813 companies in 2007.”

The Real VCs of Silicon Valley, thus, are the Angels.

What I find disconcerting is that some of the best early stage venture firms are basically putting themselves in a situation whereby they cannot do early stage anymore!

Tom Foremski weighs in at SiliconValleyWatcher with Angels are the Real VCs and Out & About: Entrepreneurs Talking About Recession- Are Angel Investors In Trouble?

Paul Kedrosky starts typing without reading first, The Myth of the Angel Investor : “The real problem isn’t in Series A, it’s what happening with so-called angel investors.” – Right. I have been frothing in my mouth talking about this problem for a while.

“In the same way that true entrepreneurs are often celebrated and seldom seen, true angels are often talked about but rarely seen writing gut checks. Many of them are echo-bubble babies, now pulling in their horns in the recent stock market carnage; others are moving up-market, especially in oxymoronic “angel investing associations”. Granted, sometimes such things have a purpose, but, as one entrepreneur-turned-investor put it to me recently, I became an entrepreneur/investor to avoid having to be a member of anything. Why would I start now?”

Well, Paul, ask a few Angels who have seen the worst of dilutions and wash-outs … they’ll tell you why being part of a “fund” that can protect the dilution may be a better bet than that $250k they just saw disappearing into wash-out land.

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I fully agree. Too much money chasing too few (quality) companies …

Sridhar Vembu Monday, April 7, 2008 at 2:58 PM PT

There’s definitely a lot of money available for startups. Competition is good, right?

Although fund size is important, I’d suggest also looking at how many investors there are at the firm. The $/investor metric is important, because it gives you an idea of average deal size. If a GP has $150M to manage, then (s)he isn’t going to be able put the money to work doing 15-30 $5-10M deals. But if (s)he has $$50M, then 8-15 $5-10M deals is more realistic during the 4-5 years that they’re investing the money.

Also, “real” venture capital can be committing $30M to an ambitious new networking box, or $1M committing to a consumer web site that provides a new service. If everyone was focused on the latter deals, we wouldn’t get many new chips, platforms or systems.

To me, venture capital’s diversity (of fund size, investment thesis, investment style, market, technology, stage, etc) is its biggest strength.

Having said that, yeah, there aren’t many funds doing small seed-stage investments, and angels play a really important role there.

Alex Osadzinski Monday, April 7, 2008 at 5:30 PM PT

Alex,

Competition may be good, but irrationally bloated valuations are very unhealthy, right? That’s what all this money is doing to the deals.

As for chips and boxes, not much of that going on these days …

Sramana Mitra Monday, April 7, 2008 at 6:21 PM PT

[…] Venturebeat reports that Foundation Capital has raised a $750 Million new fund. The firm’s last fund was $525 million, closed two years ago. Goes back to my question: Who are the real VCs of Silicon Valley? How can you practice true venture capital if you have to put so much money to work?[From The Real VCs of Silicon Valley? – Sramana Mitra on Strategy] […]

The Real VCs of Silicon Valley? | Venture Chronicles Monday, April 7, 2008 at 6:37 PM PT

[…] in the market.  In part this simply reflects an overall trend across VC sectors of larger funds, as discussed out there in the blogosphere recently.  But it does seem to be particularly striking in the cleantech space.  Generalist firms are […]

Greentech Media: Cleantech Investing » Blog Archive » Go big or go home? Tuesday, April 8, 2008 at 8:54 AM PT

Also from Center for Venture Research Director, Jeffrey Sohl – 2007 Angel Analysis

Angels continue to be the largest source of seed and start-up capital, with 39% of 2007 angel investments in the seed and start-up stage. Angels also exhibited an interest in post-seed/start-up investing with 35% of investments in this stage. Expansion stage investing (21%) showed the biggest increase. While angels continue to represent the largest source of seed and start-up capital, market conditions and the capital gap are requiring angels to engage in more later-stage rounds.

The reality is that seed/startup investing is becoming more and more scarce.

Even traditional VC firms such as Charles River Ventures and Battery have entered into the void left by true angel level funding (+/- $250K) but that cannot work for reasons of economic and operating efficiency – and most importantly of all, attitude.

There is another model which addresses all of the needs (and opportunities) of seed/startup level investing and that model is defined by The START Fund.

Elliott Dahan Tuesday, April 8, 2008 at 12:37 PM PT

I am also hearing that many Angels are unhappy about their investing records. They are bitter after being washed out of their investments, and are taking a fresh look at their strategy.

In general, investing a small amount of money works well if every subsequent round is an up-around.

If, however, either markets take longer to develop than the entrepreneurs imagined, or either strategy or execution isn’t flawless, often, companies have to be recapitalized. This is when early stage investors get washed out, unless they also participate again prorata.

Angels often don’t have the money to keep doing these later round (not necessarily later stage) investments, which is where the trouble begins.

Experienced Angels have gone through these cycles, and have learned. Some are holding back. Inexperienced Angels, armed with new wealth, are ready and raring to go!

My personal observation is that Angel investment works well if the deal is one of two kinds:

(a) a quick build to flip deal that doesn’t require too much money, and liquidity is available within a year or 2.

(b) Home run deals that take off like rockets.

Anything in the middle – which is 70-80% of VC deals – unless the Angel is wealthy enough to participate pro-rata in the subsequent rounds after the first seed investment, generally is bad news for Angels.

Sramana Mitra Tuesday, April 8, 2008 at 1:36 PM PT

One of the first things I was told by my informed friends when I considered becoming an angel investor was that I had to be ready to participate pro-rata in subsequent rounds. I am a member of Common Angels; the group has been around for over ten years and understands these things very well.

I knew better than to try to invest all by myself. A good angel group like ours provides the knowledge and experience that you need to do a good job as an angel investor.

However, we certainly do deals in which we are expecting an exit in much more than just two years. I don’t think it’s that different from what a VC firm would do. Except that we do not have to pay back limited partners after a fixed number of years, so it seems to me that we actually have more flexibility than a typical VC to take our time, if we have a company that continues to look promising but is taking longer than expected.

Daniel Weinreb Thursday, April 10, 2008 at 4:34 AM PT

Daniel,

I think a group of competent Angels investing their own money over multiple stages of a company is definitely a good model to explore.

The caveat is, there needs to be enough money in the pool to sustain the building of serious companies, not just itsy-bitsy built-to-flip web 2.0 stuff.

Sramana Mitra Thursday, April 10, 2008 at 4:42 PM PT

[…] another side to this.  Sramana Mitra obviously feels this may reign in bloated valuations and gut check-writing. I’m inclined to agree (economics 101 here: misallocation of resources = FAIL). The concern […]

Will the Real Venture Capitalists Please Stand Up? « Eric Gonzalez Wednesday, April 16, 2008 at 5:49 PM PT

[…] The Real VCs of Silicon Valley? – Sramana Mitra on Strategy […]

Stuff I noticed – August 11, 2009 : Thomas Korte Tuesday, August 11, 2009 at 7:02 PM PT
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