Venture capital is supposed to be mechanism for funding at the highest levels of risk and reward. But somehow we've decided that it's the only model for Internet companies. So a lot of companies and individuals with perfectly workable small or medium-size ideas end up inflating them to VC size to get funding, and then fizzling out. A sad side effect is that it discredits the ideas.
We have a grandiosity problem in Silicon Valley. The problem isn't really VC, but the lack of alternatives along the other parts of the risk/reward curve.
I recently ran a survey of my local startup community in Western NY and 47% of the software startups in the sample said that they intend to pursue venture capital financing in the next two years (with angel funding a distant second). It's likely that 99% of these startups are in for a rude awakening...
Unfortunately, many of these startups blame it on our local funding environment (or lack thereof), which pales in comparison to SV. I blame it in-part on the startup media over-hyping the role of VC in financing an internet company. Many of these startups could turn into profitable small or medium-size businesses, yet they've been brainwashed into thinking VC is the only way to go.
It's sad because they could boost our local economy if they chose to spend their time pursuing a more reasonable financing path that is better aligned with their business model and resources instead of wasting their time pursuing VC.
Perhaps VC, or even the whole funding side of the startup world is unsuitable an approach which does not occasionally produce Goole-sized companies. Maybe different investors can take advantage of different areas on the risk/reward curve.
In any case, the current wave proliferation of startups is premised on the idea that relatively little cash is needed to get a beachhead. I think it's also true that there are viable ideas that would generate millions or tens of millions per year, but not billions.
I like OKCupid as an example. They actually came out with a blog entry that outlined what they saw as the problem with paid dating sites (a big industry), that their free site works better. It made sense. Free sites have more users, so more people to meet in your area. They don't need dishonest pay-to-reply gimmicks. A bunch of reasons. OKCupid is a popular service with a lot of users. Even if they are generating far less per user than paid subscription sites, they are still able to generate some cash.
If generating less cash by being free results in a better service, the free service should win. If they can make enough to be profitable, pay employees well and keep the service going that's great. Then they sold the company (and pulled that blog post). The site exists, but it's stagnated a little. It seems like a good case study, because there seems to be pressure that builds up for such a service. They're popular enough that people on the street around the world know the name, but not making the kind of dose that interests big money. It seems like there is a pressure for these companies to stop existing. They are pressured to risk massive revenue growth, sell, whatever. The bottom line is that it seems hard for something like this to remain like this. There's a belligerent invisible hand nudging them off the game board.
It's a pity. A dating site isn't saving the world but for people who meet up (or hook up) on the site, it's a good thing.
We would be better off if companies like this could continue in this state. Why can't a business that size continue to exist?
At the end of the day, the investing strategies and internal logic of VCs or angels should not be the sole determining factor for what businesses can exist, should it?
I see a lot of startups taking angel funding with the expectation that they will then take on VC funding. This pattern has gotten so institutionalized that some people even refer to angel investment as a "round" in an of itself.
I think GP's point is that for most other businesses VCs are never in the picture whatsoever, neither at the beginning stage nor later.
There are substantial differences between angel investors and VCs from a practical point of view, even if both will get you access to capital:
- Angels rarely do due diligence, VCs almost always do.
- Angels tend to look much more at who else is investing in the company, almost never want to be 'alone' or 'first'.
- Also they are typically much less experienced as investors and having them on-board can be a pain, especially when you're doing a start-up outside of their field of expertise
- VCs investment tends to come with some visibility perks
- it is usually easier to get investment from a group of angel investors than it is to get investment from a VC
You are certainly right. But that's a kind of insider explanation from within our world.
If you're explaining the economics of computerland in broad strokes, there's no significant distinction to make between angel investment and VC. The two groups intermingle, they fund the same projects (with the same expectations of risk and growth), and they even move in the same social circles.
> But that's a kind of insider explanation from within our world.
Good point, I will have to work harder on divorcing myself from that. It's hard though. For the purpose of founders that are relatively in-experienced the two groups appear similar enough that there is little to no outward difference. That viewpoint is worth correcting.
All of the angel dynamics you're talking about here are premised on a trajectory that takes angel-funded companies through VC rounds. If there wasn't a presumption that N out of K portfolio companies would get an A round, angels wouldn't invest this way.
For the most part yes, but it's not an iron-clad law, I've seen angel funded companies do much larger angel rounds later on bypassing the VCs completely up to an exit.
Sure. But you don't think that the terms you got for your company benefited from the broader angel market's expectations about how most companies will achieve liquidity (almost all of them through VC)?
We have a grandiosity problem in Silicon Valley. The problem isn't really VC, but the lack of alternatives along the other parts of the risk/reward curve.