Angel Investing, Entrepreneurship & Learning

While reading through my daily google alerts, I came across an article that grabbed my attention.  The article is about the Northwest-based venture capital firm Monster Venture Partners and Rob Monster’s thoughts on the early-stage venture capital market.  The quote that stood out to me was:

“To keep up the current pace of investment and incubation, and capitalize on current low valuations and low operating costs for funding startups, now is a good time to raise an early stage fund,” says Monster. “In 24 months, many of the companies we back today will be ripe for harvest.”

I agree that now is a great time to raise an early-stage venture capital fund.  However, when I say “early-stage,” I’m not saying investments of $3-$5M, I’m saying investments of $750k-$3M.  Here are a few reasons why:

1. It is widely known that there is a funding gap above the traditional angel investment ($300-$750k) and below the traditional VC investment ($3M+).
2. Most of the current VCs can’t play in that space because their investment fund is just too large.  For example, if they have a $100M fund, it wouldn’t make sense to do 100 investments at $1M each because it would just be too hard for them to manage all of those portfolio companies.
3. Most of the current VCs move up the food chain (into the larger investments) bc their management fee (salary amount) is usually getting a management fee of a certain percentage of the fund size.  So, if their fund size is $100M and their mgt. fee is 2%, then they have $2M for salaries, office space, etc.  But, if their fund size is $200M, then they have $4M for salaries, office space, etc!  Make sense?
4. As Rob has mentioned, with the advancements of technology, it doesn’t require as much capital to start and grow a company as it used it.
5. And finally, there are A LOT of very good opportunities in that investment stage.

I realize that there are a few aspects that detract from investing early-stage — one of them being the fact that the deals are, well, early-stage.  That often means that the deals are higher-risk because the company has yet to attract significant traction and/or revenue.  That being said, I think that the market is under-served and the opportunity is large.

Who’s ready to raise an early-stage fund with me? 

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It’s been fun to watch the Paul Allen story unfold.  If you didn’t know, Paul is one of the co-founders of FundingUniverse and the brain child behind the original website.  He is also a board member that I respect & trust.

A few years back, Paul was the founder of Provo Labs — a technology incubator in Utah County.  While they had a talented team and a lot of good ideas, ultimately the program didn’t turn out the way they were hoping because they were too scattered with an admitted lack of focus.

As a result of that experience, Paul got back on track and focused his attention on his area of expertise:  internet marketing, families, and geneology and started the World Vital Records/FamilyLink property.   Periodically, I’ve been able to get updates from Paul and I can tell that they are just rocking!  The company is growing quickly and he has attracted a lot of attention.

I was especially encouraged when I saw an article last week that had his facebook app We’re Related on the Top 25 Facebook App list as #33.

Congrats, Paul.  Keep up the good work (and don’t forget about FundingUniverse) during the process!

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Thanks to Chris & Ponzi Pirillo, Trent and I are here in Seattle attending the Gnomedex 8.0 Conference… and I have to say that I am impressed.  I’ve attended a lot of conferences and this one blows most of them out of the water.  I really like how they approach topics and do their best to include the audience into the show.

So far, we’ve talked about:

• www.ma.gnolia.com
• icanhascheezburger, the owners of the FAIL blog (and others)
• Search life meets real life — talking about how our “online” identities/world mix with our real-life identities/world
• Meet Generation Y:  16 yr. old Mark Bao (who has already sold 3 facebook apps) is interviewed by Francine Hardaway (60+ yr. old evangelist)
• Using Social Media for Good Causes
• I’ve also conducted a few interviews (for a new hire that we are looking to make here in the NW) during my breaks — and they have gone well too

Good times.  Fun conference.  I love Seattle — gorgeous town (and I can’t wait to bring my wife back in a few weeks).

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There are a couple of resources from Paul Graham of Y Combinator that I have come across recently that I think are very beneficial for those entrepreneurs trying to raise investment capital.  Here they are in no particular order:

1. Paul has recently posted an entry called, “A Fundraising Survival Guide.“  Here are a few key highlights:  a)  fundraising is hard — very hard.  b)  It takes investors a long time to make a decision because of the combination between investing a lot of money and the fact that they are often dealing with topics in which they are not experts.  c)  No matter what, you need to keep the company moving forward.  This works best when there are 3 founders — 2 to keep the company going and 1 to focus on fundraising.  d)  Strive to get to “ramen profitable” as soon as possible — which means that you are making just enough money to eat ramen noodles.  That way, you’re not desparate for an investor’s money.  e) Odds are against you.  According to one VC, only 1 out of 800 deals will receive an investment from their firm.  f) Figure out why investors are rejecting you and improve your pitch.  g)  Key factors in an investor’s opinion about you are the opinions of all the other investors about you.  And finally… h) raising money is hard!
2. Y Combinator to Offer Standard Funding Legal Docs: According to Techcrunch, it appears that the Y combinator (in partnership with the law firm Wilson Sonsini Goodrich Rosati) will have links to some standard legal docs for an early-stage (first round) of funding.  Believe me, the legal expenses for a small round can really cost the start-up a lot of money and so I think that this is a great idea.

Thanks to Paul & the Y Combinator team for the resources.

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According to the Wall Street Journal, it appears that Google will be launching a VC arm to their company… and why wouldn’t they?!  I guess that they have about $12.7 billion dollars worth of cash reserves so they might as well put it to use.

Since the story was released, there has been quite the discussion throughout the blogosphere, including the comments of Fred Wilson, a partner in New York’s VC firm Union Square Ventures.  Fred is pretty critical of corporate-backed venture groups… and he makes some good points.  That being said, it doesn’t hurt to have some of that $12.7B back into the hands of entrepreneurs & innovators.

I look forward to see how everything plays out.

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