Friday, November 03, 2006

Are Angels the New VCs?

This week brought the announcement that Charles River Ventures would launch Quick Start -- a more angel-oriented approach to funding start-ups than traditional VC.

Combined with the earlier announcement that Sevin Rosen Funds would be returning money to investors instead of putting it to work (and not raising a new fund), speculation has started that the traditional VC model is dead.

The argument goes:

1. Large amounts of capital are no longer needed to launch very successful start-ups. Joe Kraus famously opined that it only took $100K to start Jotspot, and $3MM to start

2. The IPO window doesn't exist today as it once did, thanks to Sarbanes-Oxley.

3. There's too much VC money chasing too few deals.

Fred Wilson disagrees with this view and correctly points out that people have been complaining about the too-much-money-too-few-deals for 25 years. He thinks VCs will just get leaner and meaner by (1) raising smaller funds, (2) going for $100 - $250MM exits, and (3) doing more M&A exits than IPOs.

However, Josh Kopelman of First Round thinks that CRV's announcement does portend of a major shift in the VC market. He points out that angel investing has better risk-adjusted returns over the last decade than any other stage of investing. Plus, a more conservative going-forward assumption would be average exits far south of $150MM. Therefore, there are likely to be more CRV-type announcement from "traditional" VCs over the coming years. Will they be able to do it well? That's less clear.

There are winners and losers from these confluence of trends.


  • The bluest of "blue-chip" VCs. The Sequoias and KPCBs of the world shine brighter when the maddening crowd is rushing to chase the latest trend of VC investing. They've been there and done that time-and-again.
  • Existing Angel Investors who have a track-record. When a space gets hot (i.e., angel investing), those who have been there for a while are the old wise men. Josh Kopelman, Jeff Clavier, and others will see a rise for their services even as others rush in. There will be a flight to quality.
  • Traditional VCs who are able to make the leap and really differentiate from other angel investors. Although CRV is a great firm, their success is not guaranteed. They need dealflow; their GPs needs to be seen as credible by non-nascent entrepreneurs; and they really need to be able to deliver value to their investments (beyond the simple "we love to roll up our shirtsleeves alongside our investee companies" platitudes).
  • 2nd and 3rd Time Entrepreneurs: They're even more sought after following this news than they were before. We are heading for a Hollywood-type star system where Bill Nguyen announces his idea for his next start-up at lunch and the deal is done by dinner.


  • Stuck-in-the-middle VCs: Those VCs who do a little bit of angel investing and a little bit of traditional are likely to do neither well.
  • Former Great VCs who don't adapt to changing times: Remember when Softbank was king of the hill? Hot VCs who have yet to reach the echelon of Sequoia and KPCB are not assured of long-term success. They are also likely to stick-to-what-they-(think-they-)know-best. Dangerous, when the rules of the game are changing
  • Later-stage/Mezzanine Investors: They just got even less relevant.

These are interesting times. Enterpreneurs are more exposed than ever to demonstrate whether their ideas will succeed or not. The same goes for traditional VCs. May the truly value-added players win.

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