Super Angels, Lean VCs, Proto-Incubators, Whatever. Focus on Social Contract.

I swore to myself I was going to stay out of this super angel versus VC debate but I find I have this compelling urge that I need to satisfy.

First of all, let's move away from Roe vs. Wade style debating. There is no super Angel class that somehow redefines what venture is about, and venture is not a species threatened by sudden shifts in temperature. These incredibly convenient simplifications may help the debaters explain why their camp mates best, but they remain confusing and are not useful to those outside the industry.

Let's quickly rehash:

Four Steps to the EpiphanyCapital efficiency has come of age. The new orthodoxy rightly states that some businesses can build, launch, iterate on limited cash. Those that have product greatness and are heavily networked into the right groups can achieve velocity faster than others. The best bard is Steven Blank and his awesome 4 Steps to the Epiphany.

Networks thrive on networks: the notion that somehow the dominance of Facebook, Google, et al means that the market has matured is misguided. We live in the age of markets and platforms feed off platforms. Zynga is the posterchild and a new Eldorado for those seeking to derive economic rent from Facebook.

Many VC's are lazy and hooked on fees. Okay so whilst it's the laziest generalization of all, it's true that many firms are run by fundraisers and not by outbound folks who actually care about entrepreneurs, and they get paid too much regardless of returns and hence have a self-destructive bias towards larger funds regardless of their own stage preference (read: early versus late). I took the trouble of getting feedback from a ton of entrepreneurs on this, read the "Arrogant VC". This create a great opportunity for newcomers.

You can see market evolution, and the market has responded in kind with the creation of new financing options for entrepreneurs.

Here is a taxonomy of what we see:

  1. The Super Angel (Jeff Clavier) does his own deals, the ultimate lean angel, talks little about them, gets them sold, has a high batting average, probably shows up at your board.
  2. The Accelerator (YCombinator) takes you at birth (as entrepreneur) and accelerates your development, hopefully making you in no time a full citizen of the entrepreneurship word able to deal with the pitfalls of growing a small business
  3. The Incubator (Betaworks) leverages these trends through a mixture of internal development and external financing
  4. The SuperNetworked Angel (Ron Conway) invests in everything that fits a theme provided there is some kind of "social proof", looks for some massive upside generators, plays the optionality game.
  5. The Small Possee Fund (FounderCollective) gets a group of networked folks together, raises a decent amount of money, does deals selectively, has some full-time partners, makes sure its positioning as first-round-only-we-dont-follow is clean and well understood.
  6. The Lean VC who treats every seed like it matters (Mark Suster) does seed because it's what he does, does only a few deals, treat everyone of them like a "real" deal, plays his role as a lead

So McClure says "most VCs are dinosaurs"; I agree, but those that keep getting funded typically aren't. Kedrosky says super angels are probably too abundant and more likely to be short lived; the response from Dixon and Sacca is interesting: no because the good ones invest together and keep pricing in check. Does that remind you of someone?

What's my point: this "species" debate is not the right debate. VC versus not VC, who really cares. I know for a fact that David Skok at Matrix just spent a ton of his personal time helping an entrepreneur that is not even looking for money getting his go-to-market right, opening doors to analysts and customers. He might be a VC but as an entrepreneur I would sure want that kind of commitment on my board!

What you do need to care about are is the SOCIAL CONTRACT:

  • Do we have DNA match? Can I survive an eight hour car drive with this guy or girl?
  • Is this a partnership? is there mutual respect, alignment, understanding? Do we agree on strategy (or how we discover it)?
  • Does this partner really get my market? Does he work and play with other people who get it?
  • If it matters to you (I think it always does), does this person deeply understand what we do?
  • Do I want and need a lead? Do I want social proof or a guy who is going to sit on my board and actually have some hours in the day to help me out?
  • Is this person accountable? Do they care if I go under? Who owns my demise? Who is willing to support me no matter what?
  • If I need them, are there reserves lined up to support me? How much? When does this financier want to exit and does this match my own expectation?

Here are two questions I have not heard decent answers to:

  • If you are a VC fund with 5 partners and you invest in 50 seed deals, who cares when one goes bust?
  • If you invest in 200 companies at seed level, what are you really contributing? How is that not a passive options portfolio?

I don't have hard and fast rules, each investor needs to find out what works for him and be open about the social contract he builds with the entrepreneur. If you're an experienced entrepreneur and you want people to let you get on with it and get access to some good network, find investors that match. If you think you might need a ton of guidance, money, support, whatever it mat be, find investors that match.

I think the common trait amongst these various species we described above is low body fat. Steve contributes a good expression likely to stick and I will leave him with the last word: the Lean VC. Or did I meant the lean Angel? Damn, here we go again ...

Reprinted from FredDestin.com

Fred Destin joined Atlas Venture in 2004 and is a Partner in the technology group. He focuses on software and technology-enabled services and digital media infrastructure and applications.

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