We all know the venture capital industry has been disrupted, but from the outside it is difficult to see how this will effect startups.
Here's a real panel of experts talking about how that disruption works for both the entrepreneur and the investor. I was privileged to hear them at this year's Summit at Stanford.
- The host: Sam Angus, Partner, Fenwick & West
- Jeff Clavier, Founder, SoftTech VC
- Aydin Senkut, Founder & President, Felicis Ventures
- Allen Morgan, Partner, Mayfield Fund
- Patrick Chung, Partner, NEA
- Howard Morgan, Partner, First Round Capital
These speakers all agree that there have been two fundamental changes, one on each side of the startup equation. On the entrepreneur side, it takes much less capital to get a company off the ground, especially if it's a software company. Between cloud services, distributed teams, and new programming tools, many infrastructure costs approach zero.
On the investor's side, the traditional big time IPO exit has gone away. Instead, exits are prolific in the $15 million to $25 million dollar range, where larger companies prefer to acquire startups earlier rather than pay a premium.
That makes it more difficult for a VC with a billion dollar fund to invest a significant sum and expect to get the customary 10x return. rather, the 10x return goes to the angel, who can invest a million bucks and feel thrilled with a $15 million acquisition of one of his portfolio companies. As an angel, I invested in a company that was acquired last year for $40 million and I was so ecstatic I didn't even measure the multiple of the return. I had not invested enough money to be concerned with math; I was just happy to have the cash.
And that's why the SuperAngels are taking over the world. SuperAngels, indeed any angels, primarily on investing their own money and have deep domain expertise, which allows them to help their companies by getting involved.
A good venture capital firm invests other people's money, also with deep domain expertise. Where an angel does fewer deals and gets more deeply involved, a VC firm does many deals and has multiple partners and areas of expertise.
Investing other people's money without that deep domain expertise is generally the province of private equity fir ms. And investing one's own money without expertise is what one panelist called "a dentist."
This doesn't change the fact that if an entrepreneur can't take a company from 0 to $15 million value to an acquirer it will probably need more money to scale. Klout, for example, needs a certain amount of cash, while Bloom Energy needs much more. And both are funded by the same firm, NEA, which is a hybrid between angel and VC.
The secret is for the entrepreneur to be hyperconscious of cash, and to seek the best partner for his needs. Especially if you want to stay at your company, because once you take VC money you will sign a contract that says your company may grow to $700 million, but you may not still be there.
And if you are curious about what these SuperAngels are investing in: it's health care, personalized medicine (23andMe), green energy, and education. The industries that most need disruption.