Thursday, September 30, 2010


I think Chris Dixon is one of the smartest investors around.  I co-invested in him when he was an angel and I've co-invested with his early stage fund, Founder's Collective.  But while I generally agree with his recent post on venture investing segmentation, I need to call bull on this:

What we are witnessing now is a the VC industry segmenting as it matures. Mentorship and angel funding are performed more effectively by specialized firms.
It's kind of surprising to me that someone who did such an excellent job as an angel would imply that he really wasn't the best investor for those companies in the first place but, hey, he's entitled to his opinion.  But saying you'd be a better angel if you were a firm is like saying that you'd be a better amateur athlete if you went pro*.  You can't be an angel if you have a fund.  And though this sounds like a semantic argument, it make a real-world difference to entrepreneurs.

What bothers me is the lumping of angel motivation and technique in with the "Super-Angel"/micro-VC motivations and techniques.  The otherwise excellent David Lerner makes this mistake when he says he intends to explicate the angel investing world and then lists, as half his angels, people with funds.  This is a fundamental analytical mistake: taking the average of a bimodal distribution tells you nothing very interesting at all.

There are reasons why angels existed in the first place.  While the lower cost of getting a startup from A to B has changed the dynamics of early stage rounds, it hasn't changed most of the fundamental advantages of having individuals investing their own money: a personal--rather than institutional--connection to entrepreneurs, the ability to make quick decisions, the ability to make decisions that may not seem fiduciarily responsible but are for the greater good, primary expertise in an industry and in company building rather than in money-management, etc.  Most importantly--despite what the Supreme Court may think--firms are not people and they don't, in the long run, act like people.  Angels do.

* While this is the reasoning behind the modern Olympics and many college football programs, it flies in the face of the actual meaning of "amateur" and destroys what makes amateur athletics so appealing. 

Friday, September 24, 2010

It's not about the founders, it's not about the money. It's about what you're building.

I spent my Summer thinking about how I could continue to be useful as an angel investor.  Then this Angelgate thing happened and I can't seem to write the post I meant to write about it.  So I'm writing this instead, hoping to get some thoughts out of my head and move on.  I don't think I'm saying anything new here and this is just a distraction from real work, and I've allocated time as such, so forgive the disjointed style.

1. "Judean People's Front?  We're the People's Front of Judea.  Judean People's front, caw...  The only people we hate more than the Romans are the fucking Judean People's Front."  Every successful revolution is the same, cold comfort though it is, the most vehement feelings are directed towards people working towards the same goals in different ways*.   We're all on the same side and we all want the same thing: more and better startups.

2. Venture investment today is far preferable to every other system of financing innovation we've ever had.  It's not perfect, or even great, but it's far better than what was.  The financing of innovation has improved, in fits and starts, for the last five hundred years.  Think about how the early explorers were funded, think about how the Wright brothers were funded, think about how the second industrial revolution was funded.  For goodness sakes, think about how internet startups were funded fifteen years ago.  The new VC model is better.  The new angel model is better.  Should we make it better still?  Of course.  Should we talk about just chucking it all?  No.

3. It's better for entrepreneurs, but that's not the driving force here.  The entrepreneurs and investors are both bit players in a bigger show.  I tend to disagree with Jon that founders come first, although the why of my disagreement may seem a bit like theological hair-splitting.  Founders don't come first, the idea does.  If a founder thought it was all about them rather than what they were building, I wouldn't invest.  That said, no one works on building something as hard or as smart as the person whose idea it was.  I back ideas, but I believe in founders.  I believe in them because they believe in their idea.  But this semantic distinction leads to a fundamental difference: I'm not doing this to make founders rich, I'm doing it to see good ideas turn into great companies.  When this happens, the founders tend to make a lot of money, but that's a second order effect.

4. Likewise, investors make money.  But startup investors aren't in it for the money: the return on investment is also a second-order effect.  That said, investors need to make money; if they don't, they don't get to invest anymore.  That's true when you invest other people's money, but it's also true for angels.  I have a significant chunk of my money invested or earmarked for startups.  If I lose it, I won't be able to invest anymore.  If I make money, I get to reinvest it.  Not a week goes by when I don't wish I could invest in more companies or invest more in a company that no one else believes in yet.  But not a day goes by when I don't think about the gambler's ruin.

5. Seed-stage VCs are not in it for the money, not in itself.  Angels even less so.  No one on the Forbes 400 list made it there by dint of venture investing.  No one.  [Edit, 9/25/10: Should have checked first... John Doerr and Michael Moritz are both on the list, both by dint of their investment in Google.]  Venture investors aren't robber barons, they don't make the cut.  Think about the economics of a First Round Capital... a fund structured that way won't make the partners much more than minimum wage unless it's one of the top-performing funds in the world.  Any world-class investor would have made a multiple of what they made if they had been a world-class entrepreneur.  VCs have a lower beta, it's in the nature of what we do, but we're all on the same risk-reward curve.  The startup world is a choose your own beta kind of world.  Don't get pissed off when someone chooses a different one.

I'm not defending anyone and I'm not downplaying what happened (whatever did happen... I wasn't there.)  But if one of the guys in that restaurant likes you enough to gives you a valuation, I guarantee you that you can find a less well-known investor who will give you a higher one.  There is no collusion that could affect your outcome.  I doubt there is anyone who believes otherwise.  So I think the anger about this is really a pent up anger about the startup finance system altogether.  I've been an entrepreneur, I've raised money for a startup, and I realize how bad that process sucks, how random and uninformed it all feels.  We have to keep working at and looking for ways to improve it.  But let's not forget that we are all on the same side and we all want the same thing: for startups to have a better chance at success.

* Of course, in this case there's been no anti-bolshevik league-like purges, no ice picks in the back of the head, no duels at dawn in Weehawken.  Well, not yet anyway.