Response To Dave Lerner’s Post On Venture Capital

This weekend, Dave Lerner wrote an outstanding post on how the venture capital industry has undergone changes over the past 10-15 years. If you are interested in private technology investing, it’s a must-read — it’s not that Lerner uncovers any new angle, but he presents the changes within a narrative that captures the essence of the shift. At the end of his post, he posed the following questions (see below), and I felt compelled to log my own two cents, so here goes:

Lerner’s Questions (my answers in regular text):

What are the best investors doing to reinvent themselves right now? At the institutional level, the best firms are doing a mix of “getting smaller” and smartly attaching various sidecars to their anchor funds. Take Foundry Group, for instance. Each fund they raise is about $225M (small, relative to how big VC fattened up), and their latest was the same, but also included an “opportunity” fund (presumably with lower management fees) to be reserved for winners from the anchor fund, and paired it with FG Syndicates, their AngelList sidecar. Union Square Ventures just announced their latest fund size, a bit smaller than before, as well as their own opportunity fund, and I’d suspect a firm like USV will smartly experiment with an AngelList sidecar or syndication in 2014. At the individual level…for starters, there aren’t many true angel investors out there (investing their own money), but one example of someone who I think is outstanding as an angel is Scott Belsky. If you talk to any founder he’s backed, he has a clear filter, he takes a product approach, and he has taste. When he makes a move, people notice because he moves so rarely; rather than taking a portfolio approach, he takes the opposite approach, gliding through his network with his product sense and letting that guide him. It doesn’t scale, and that’s why it works in investing.

Who is generating the best process/manual for judging early stage investment prospects and how? I’m not sure one process will work for every investor, but one that sticks out is Nextview’s Rob Go, who earlier this year blogged “A Seed VC’s Decision Tree” and created a graphic to go along with it — click here to see it.

What will be the key to being able to form and build a great syndicate on AngelList? Right now, it appears to be social proof (as Hunter Walk blogged on this, and presented some alternatives he’d like to see). Eventually, whatever I think could matter most probably won’t matter in a few years, when people can start scoring investors on a number of dimensions. If that’s true, then there’s a window right now, for a period of time, to build up a syndicate base — though people should be aware those backers aren’t 100% committed until those first deals happen. I can only imagine some backers rushed to sign up but will have second thoughts when a deadline hits their inbox. The other path which could be powerful (but requires some real work) is for an enterprising new investor with a killer network to create a syndicate and hand-hold his/her network to get onto AngelList and publicly back him/her, to give a founder an access to a network that’s powerful yet not from central casting.

How to identify the new breed of low-life investor who uses these platforms? What’s the new camouflage they wear? I don’t know how this will work, but I’d imagine AngelList will be able to record individual accounts which ask to be referred but don’t follow up, or ask to invest but don’t wire, and so forth. It will take time for more reputation metrics to come online and standardize, but I would bet it happens.

On the other side- quality investors who didn’t have a knack for social media and blogs but were good with entrepreneurs and added massive value are now obscured from view and can only be found through the old ways, ie. practitioners who respect them “bigging-them-up” and making warm intros to them. How to find and identify them? A platform like AngelList makes it a bit easier to see cohort patterns of how investors can both pick and be helpful. For instance, asking for a referral will be commonplace, where it will just be weird if a founder doesn’t write some kind of endorsement or review for one of his/her investors.

I have speculated about two subsequent tech/software led waves (four and five above) that may further disrupt the VC industry. Where do you see it going? This won’t be a popular statement, but I don’t think the answer lies in fancy data analysis or predictive algorithms. Those sorts of tools help with some higher-level findings, but let’s be honest, the tools are in place today and all the firms rushing to find the next big thing in the fickle consumer category didn’t find Snapchat. In fact, the one firm which found it early and really put wood into the company is one of the smallest firms, in terms of partners and employees overall.

Will there be a new breed of super-angel that sucks up all the air in the room due to their huge social profiles? Will they emerge from AngelList Syndicates or elsewhere? The bottom-end of the market (I don’t mean bottom in a bad way, but meaning the angel/seed level) will remain crowded and more capital (and therefore investors) will come into the category. Crowdfunding, on the whole, is a mega-wave.

Will most funds get raised on AngelList in the future? “Most” implies at least or over 51% of total angel/seed funding and venture capital. In the “future,” perhaps we will get there, but it will take at least a few years, if not more. For now, most deals will happen the old-fashioned way, but there will be outliers and also deal leads who take deals to AngelList for syndication, which will get the flywheel going.

With SEC rules loosening how will this transform the fundraising landscape for funds? One dynamic many founders don’t pick up on with respect to investors is that investors, too, are always raising money. Always be raising.

As Thiel would put it, where are the remaining hard problems to solve in this space? Are convertible notes on their deathbed? What will the newer structures and instruments look like? My two cents…I think we’ll see more notes early-stage, but fewer and fewer companies taking money from traditional institutions — only until they reach certain milestones. In terms of instruments, the one area I’m curious about is the expansion of secondary markets to include startups who aren’t that big yet. That would be disruptive in many good and not so good ways, to provide true liquidity in such a high-risk area of finance.

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