VCs and Angels: Competitive Re-alignment in Early-Stage Investing

The optimal early-stage investor: this is a phenomenon I've personally been tracking for some time. It used to be friends, family and credit cards, and then hopefully on to the VCs for the Series A. This gave you legitimacy, cache, and, well, cash. But today the calculus has changed. There are organized angel groups which can give you $200k, $500k, or even $2 million to jump-start your business. And now there are "super angels," often successful entrepreneurs with big exits and valuable experiences behind them that they can bring to early-stage investing. And these folks are often willing to write a check from $50k to $10 million or more. The rise of "angel power" possessing vast financial resources, together with the steep decline in technology costs required for a start-up, seemingly threatened the primacy of the VC by providing a seed-straight-to-exit alternative. But competition being what it is, what did you expect the VCs to do? Stand still? I think not.

So what you have today is not your father's VC, one which is only willing to write a check for $5 million with the expectation of injecting $10-$20 million more over subsequent rounds. You have blue-chip VCs allocating portions of their mega-funds for stepping down, way, way down the investment curve, putting amounts as low as $200k to work in promising seed-stage companies. Why would VCs do this? Doesn't this mess up the # of investments/partner ratio, as well as the average $ investment? Of course it does. But they have to do this.

• Gaining visibility: There are simply too many good entrepreneurs and great ideas to be overly rigid with investment thresholds. Putting small dollars into an array of promising new technologies and business models lets the VCs learn and reach for return in a risk-controlled manner, something they couldn't do if 5% of a fund is riding on a single investment.

• Building the farm team: A good seed-stage investment can be the precursor to larger Series A, B and C rounds, giving the VC firm the time to really road-test the entrepreneurs and to make sure that the company warrants later-stage investments in size. And spreading these bets can provide both good diversification and the ability to press the high-potential investments, much as a good poker player will go all-in on a strong, high probability hand.

• Maintaining a strong pipeline: Having good relationships with the seed-stage entrepreneurial community is critical to keeping a finger on the pulse of the latest and greatest ideas, and to be among the first to see the high-quality deals that are ripe for funding. People talk, and good, supportive seed-stage VC investment can build strong relationships and reputation in the entrepreneurial community.

• Reaching for returns: Firms that advertise that they are unwilling to look at deals less than $5 million are simply missing the boat - they have already elected to permanently shift themselves far out on the risk/reward continuum, effectively shooting for LIBOR + spread returns, not 50%+ returns. That might be fine for funds whose charter is to only do later stage, Series C and D deals, but this does not make up the majority of the VC landscape.

And the interesting thing is the new, symbiotic relationship among angels, super angels and VCs. More and more I am seeing these three constituencies helping to shepherd early-stage companies along, providing entrepreneurs with the best of all worlds: mentoring from successful entrepreneurs, advice and connections from experienced VCs, with a robust, multi-dimensional syndicate to help the company with funding and guidance as it grows and matures. Mr. Market never ceases to amaze me, helping (read: forcing) established, "old dog" VCs learn new dog tricks and providing one of the most vibrant yet disciplined seed stage investment climates that I've witnessed in my lifetime. All I can say is - rock on.