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Archive for the ‘funds’ tag

Sources of Capital, by Google Hits

without comments

Search: “Funded by {x}”

{x} = Venture Capital
45,600 hits

{x} = Private Equity
34,500 hits

{x} = Friends
24,400 hits

{x} = Family
19,900 hits

{x} = Angels OR Angel Investors
13,900 hits

{x} = the Devil
4,020,000 hits

Protip: Startup capital can be hard to come by. VCs, angels, friends and family and Lucifer the Archangel are all sources worth exploring.

Written by Brad Hargreaves

June 4th, 2010 at 11:19 am

Why Everyone Should Get Funded (Once)

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The smart money says there’s plenty of capital out there. And from the perspective of near-term return optimization, they’re right. In fact, there’s probably too much capital out there, especially in major centers of innovation like New York, Boston and the Valley. If you were to seed fund the “marginal 10%” of companies — the companies that barely miss the current threshold for funding, if such an objective measure were to exist — the financial returns would surely be dismal.

But that’s not the only way to look at it. I argue that — from a long-term perspective — more companies should get funded.

Running a funded startup is an incredible education unlike any other. As someone who has run (a) bootstrapped startups that I couldn’t get funded, (b) bootstrapped startups that purposefully didn’t raise money, (c) angel-funded startups and (d) venture-funded startups, the learning experience delta between {(a),(b)} and {(c),(d)} is incredible. Taking money increases the volume of things going on and pushes your company to the next level. It increases the amount of stuff you have to figure out. It opens doors and enables conversations that few bootstrapped startups can have. If you pick the right investor and leverage it, the things they say about “opening their rolodex” can absolutely be correct. And you learn a lot of critical stuff about how to build a business from those people. Even taking “dumb money” can make it an order of magnitude easier to get in the door.

And most importantly, it’s a guaranteed lifetime addiction to entrepreneurship.

Even if the companies built with this seed money don’t succeed, these entrepreneurs are the foundation for successful companies in five or ten years. Every entrepreneur that fails to raise money and is forced to go back to the day job is a potential groundbreaking innovation that will never see the light of day. Claiming that “real entrepreneurs will always persevere” is bullshit. The people who create awesome, world-changing things are not always the people who are willing to work eighteen hours a day for no salary for years. They may be people without savings, with mortgages and with families. Creativity and innovation isn’t the just domain of scrappy 20-somethings, so why is entrepreneurship?

In economic terms, there’s a huge positive externality to all of this connecting and learning. That means that more of it should happen than will actually happen if every player is simply looking to maximize profit. If more startups are going to get funded, investors must believe in the positive social benefit of funding.

And I think it will happen. The comps are changing — more wealthy independent investors are looking at seed funding as philanthropy rather than a component of a diversified investment portfolio. A certain group of investors are considering their seed investments in the same pot as their patronage at the Met or contribution to an off-Broadway production rather than their private equity assets. This is a really, really important distinction, as it makes the returns of these capital deployments less of a factor. Wealthy independent investors aren’t blind — they see need for funding and innovation as the savior of our nation and economy. This isn’t just an investment; this is a moral imperative. And you can’t ignore the sexiness and cocktail party benefit of being in on the ground floor of a new hot startup.

There are good counter-arguments to be made here, but I think they are outweighed by the curation of a future generation of entrepreneurs. For instance, it is absolutely true that more capital will lead to more competition for the means of production (e.g., developers), driving up prices and making it more difficult for “good” startups to hire. This is absolutely true, but higher salaries for developers in startups isn’t a bad thing for the startup environment as a whole. After all, the world — even the world of hackers — operates by the rules of supply and demand, and higher salaries from startups will draw more developers from established tech companies and banks, for instance.

Seed funding is entering the world of philanthropy, and I think it’s a very good thing.

Written by Brad Hargreaves

May 16th, 2010 at 3:39 pm

Hacking Venture Capital: A Taxonomy

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Over the last few years (and especially the last few months, it seems), I’ve seen a proliferation of new firms iterating on the traditional venture capital model. This is awesome, but keeping it all straight can be confusing.

First, let’s understand what’s being hacked. The following is a rough oversimplification of the way venture capital currently works.

In the traditional model, the managing partners of a venture firm raise a pile of money ($50 – $500 million) from limited partners (people like state pension funds and university endowments) and put it into a fund. They invest that money in a set number of businesses (typically about 10 businesses per managing partner) over a set period of time (typically 2-3 years). They support those businesses by attending board meetings, making the occasional introduction, and (perhaps) saving some excess capital for follow-on investments in successful portfolio companies.

Many people think that the traditional venture model is broken, at least when it comes to web businesses. I’ll save a full explanation for another post, but it basically comes down to (a) reliance on traditional private equity structures leading to (b) oversized funds, which combined with (c) decreasing costs for building web businesses leads to (d) an overwhelming need to deploy capital and (e) an unhealthy fascination with the “mega hit”, misaligning the interests of founders and investors and leaving venture capitalists frustrated with even a $300 million exit.

So there are a lot of points here to hack. How are different firms going about it?

Hack the Partnership Structure: Betaworks, Tipping Point Partners
Limited Partnerships work for private equity firms and large VC shops, but it may have grown long in the tooth for supporting web businesses. In a limited partnership, managing partners earn management fees from their limited partners (investors), which scale linearly with the size of the fund. Thus, there’s a strong incentive for venture capitalists to raise bigger funds than they need. Betaworks, for example, is actually structured as a corporation and takes “investment” in the same way that a startup would. And just as a startup is incentivized to take the “right amount” of money, these firms aren’t going to raise more capital than they absolutely need.

Hack the Limited Partners: Founder Collective, Zelkova Ventures
But partnerships aren’t necessarily a bad thing. Founder Collective, for instance, has replaced “dumb money” LPs with real entrepreneurs, providing value with more than their money. With a group like Founder Collective, the LPs are much more familiar with the nature of seed-stage capital, and the misalignment of interest is mitigated. And (at least in the case of Founder Collective), they also…

Hack the Size: Greycroft, Andreessen Horowitz
Could Alan Patricof and Marc Andreessen raise more money than they have? Absolutely. Do they? No, because they don’t care to live off of a 2% management fee. And by making that choice, they allow themselves to make small(er) bets on companies that may not be the next Google or Facebook, but have a pretty good shot at a $30 million exit.

Hack the Relationship with the Entrepreneur: Presumed Abundance
I’m not sure how Presumed Abundance’s experiment will work out, but it’s an interesting hack. In an attempt to re-align incentives between investors and entrepreneurs, they have made the entrepreneur a “conditional managing partner” (of sorts) in the fund, where the condition is a successful exit that contributes to the general fund.

Hack the Value: YCombinator, TechStars, DreamIt
Many VCs bring money and little else. Some firms bring lots of “else” and very little money. “Else”, of course, means connections, assistance and (often) space. This is one of the most well-established ways to hack venture capital, although it’s still an experiment in progress.

I think there is still plenty of opportunity out there for entrepreneurs who are interested in hacking seed-stage venture capital. It’s absolutely an industry in transition, and the barriers to entry are high enough to let new entrants carve out and establish valuable niches.

Written by Brad Hargreaves

April 8th, 2010 at 2:06 pm

New York Venture Firms: Bigger Fund or Bigger Buzz?

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I’m just going to leave this here.

Venture Firms with a Strong NYC Presence, by Buzz*
Who is mentioning NY venture firms?

Venture Firms with a Strong NYC Presence, by Size of Newest Fund
What size are NY venture funds?

* Presence in Blogosphere as measured by TechMeme

Written by Brad Hargreaves

March 11th, 2010 at 10:46 am