When I started a company my co-founders and I thought and discussed
and argued about how we were different from our competitors, how there
was a hole in the market, how we were going to win by going where no one
had gone before. We got potential customers, suppliers, employees
excited by talking about how we were different.
If an entrepreneur were to map venture funds on a traditional 2x2 competitive matrix, using their two most important value propositions as the axes, it would look like this*:
In the product world, if you are really good at something, you compete on price to take more market share. In the services world, where your expertise isn't that scalable, when you're really good at something you raise your price. VC is a service business and I often see the VCs with the best reputations offering a deal that is slightly worse than average and still being chosen as the funder. Conversely, I have often seen lesser known VCs or financial backers from outside the VC world offering much richer deals in order to be chosen. If you want to have price discipline (and you do) then you need to offer something besides price, and it better be good.
Ask yourself: how do I distinguish myself from all the other sources of money out there?
This seems like a ridiculous question to some. You, after all, have the money; shouldn't you be the one doing the distinguishment? When you walk into Tiffanys with a Hefty bag stuffed full of large bills, the salesman doesn't ask "Why should I do business with you?" He sprints across the floor and asks "How can I help you?" Thinking this is how it works in angel investing is a classic rookie mistake. The founder who is willing to take your money regardless of anything else you bring to the table is the founder who can't get money from anyone else. This means one of two things:
- You are smarter than all of the other investors and see something they don't, or
- The company is not a great bet.
There are many ways to add real value through the process. I'll talk about that in detail in a few posts. For now you need to think about positioning in general, about what you have to offer, both so you can generate the right kind of deal flow and so you can plan your investing strategy.
Here's a potentially scurrilous example of positioning among early-stage VCs.
In reality, none of these funds fits as well into their box as this graphic makes it look. And each offers something that this box doesn't capture (not least, among this group, attitude.) But you should have a sweet spot, you should be able to articulate it, and, more importantly, it should articulate itself through your actions and communication. Entrepreneurs will find you if they know you are what they are looking for.
Anywhere you choose in this cube has its tradeoffs. If you spend more time helping your entrepreneurs you have less time for other things. If you spend less time helping you are less valuable (assuming your help is valuable.) If you take less risk you either aim for lower returns or you face much more competition for investing in the deals. If you're more specialized you need to work harder on finding potential investees but you are better able to evaluate the ones you do see.
Where you fit depends on what you know, how much time you have and your personality. It will determine how you spend your time, how you generate dealflow, how you filter deals, and how much you can help.
Previous posts in this series
* For the VCs' real customers, the LPs, it probably looks more like this.
** In terms of risk-return.