“Power law returns”
“‘Rich-get-richer’ competitive dynamics”
Startup culture is replete with catchphrases — like the two above — that hint at the intense competitive and economic pressures at work just below the shiny, idealistic surface.
This isn’t news to anyone who’s been a founder or funder of a venture-backed business; the venture capital marketplace operates on explicit “up or out” rules, where a small minority of companies funded at any tier of the market make it through to the next level.
But the collapsing cost of software innovation has caused the bottom rung of the capital markets — what used to just be called “angel” investing — to get mixed up with venture capital in ways that are often confusing to first-time entrepreneurs.
I run into this all the time.
My partner Andy Sack and I started our seed fund — Founders’ Co-op — to do the work that Series A venture used to do, but that — at least in the software business — now requires 1/10th the capital that it did 10 years ago.
We think of ourselves as a “right-sized” point of entry to the modern venture market: serving founding teams who have the talent, vision and drive to raise institutional money, but who need 12-18 months of runway and support to validate their core hypotheses and flesh out their team and go-to-market strategy before attempting to raise their Series A.
But because we write smaller checks — typically $100-$250K to start, with more reserved for follow-on — we’re often approached by entrepreneurs in search of “angel” financing. Saying no to these entrepreneurs typically requires us to explain the differences between the two. (I’ve been doing this more often lately, which is why I was moved to write this post).
The difference between an “angel” business and a “venture” business has nothing to do with the size of the first check (or even the kind of people who write those checks), and everything to do with the ambition of the founders seeking capital.
This isn’t a value judgement — there are all kinds of successful, profitable businesses in the world and only a tiny sliver of those are a good fit for venture capital.
Early-stage venture capital — from Seed through Series A — is primarily a filter for human beings, not business ideas. The system is deliberately designed to screen out anyone who doesn’t harbor near-lunatic fantasies about upending massive existing industries — or inventing new and even-bigger ones — and whose founding team brings mind-bending levels of talent, experience and dedication to that goal.
Building a sound business, making a profit, feeding your family, contributing to your community: these are all worthy and honorable goals for an entrepreneur, but they are only incidental criteria (when they rate at all) in the venture capital selection process.
I love entrepreneurs of all kinds. Anyone with the courage to step outside the norms of employment culture and strike out on their own is a hero in my eyes, and I’ll do whatever I can to help them on their way.
But as an investor, there’s only one kind of entrepreneur I want to back: the relentless, hungry, flawed, brilliant, monomaniacal freaks who actually believe they can do it better, smarter and bigger than anyone else in the game.
For better or worse, I’ve cast my lot with the lunatics.
I don’t think this reflects particularly well on me as a human being — competitiveness is one of my many character flaws, and the venture business brings out my own competitive drive and ambition in ways that aren’t always so pretty to look at. But I’ve made a series of conscious choices in my work and life — starting a fund, raising investment capital — that require me to be crystal clear about what I do and why I do it.
I hate saying no to so many of the smart, creative and ambitious entrepreneurs I meet every week — many of whom will go on to build strong and valuable businesses. My best explanation is that I’m looking for venture-grade needles in the haystack of angel-stage deals and — at least to my eyes — they just don’t come along all that often.