In Monday’s email, I wrote the following:
“Smaller VC funds are in vogue right now anyway, as seed-stage investors have become the new rock stars. Traditional VCs have become adult contemporary.”
The line was in reference to a larger argument about the potential consequences of changing carried interest tax treatment, but has generated a bit of independent discussion. It was used to introduce a panel at Angel Bootcamp earlier this week, was tweeted up by angels and has generated some VC teeth-nashing via email. So it seems to be worth unpacking a bit more:
1. Angels, like rock stars, are loud. Remember back in the late 1990s, when venture capitalists were shouting their (paper) accomplishments from the rooftop (parties)? They would share their IRRs with any reporter, speak at any conference and pose for any magazine photo. Total media whoredom, with more johns than most of them could handle.
Well, much of today’s angel class also craves attention. Not so much for ego-stroking, but because they believe that higher visibility leads to better deal-flow. And these guys have amps that go to eleven, thanks to blogs and social networking tools like Twitter. (Note: There are exceptions, of course… let’s consider Ron Conway to be Izzy Stradlin — great at what he does, but usually lets others step into the public spotlight).
2. Angels, like rock stars, can be impulsive. A growing percentage of angels have begun to follow a “spray and pray” strategy, investing in numerous companies within a single week. Sometimes these investments even get made without meeting key members of management (great biz plan) or, conversely, without having a clear sense of what the company plans to make (great management team).
Yes, this is a big generalization. Many angels hold their money tight, and want to hear entrepreneurs say something like: “I will be dedicated to making sure you get this check back within two years.” But those are usually smaller angels (i.e. cover bands, not rock stars).
Worth noting that there is a more generous corollary here, courtesy of a talk given earlier this week by angel/entrepreneur/reformed VC Sim Simeonov: Most angels will lose money, but they improve their ROI potential by doing more deals (or at least a certain threshold of deals). We could call this the Theory of Prince (who has released 31 albums since 1978) — do a bunch of stuff that sounds interesting, and a few big hits will emerge.
3. Angels, like rock stars, are loved. Ask most any entrepreneur — particularly in Silicon Valley — for a quick comment on Dave McClure or Jeff Clavier or Chris Sacca or Chris Dixon or anyone else of their ilk. Chances are you’ll learn two things: (1) The entrepreneur has had an actual interaction with the person (often virtual), and (2) They’re smitten.
The first point matters because accessibility has been one of the great historical VC failings. The reason so many traditional VC firms have copied Josh Kopelman’s “office hours” is because entrepreneurs kept gushing about them, and VCs realized that they were missing out on a large demographic (kind of like why Pat Boone recorded a metal album).
The second point is not based on transaction consumation, although plenty of those do occur (refraining from making a groupie reference here). Instead, it’s because many angels make a special point of listening to entrepreneurs, providing advice and even making introductions. The entrepreneur takes precedence over the deal.
4. Angels, like rock stars, are feared (and sometimes resented) by their elders. As IT startups get cheaper and cheaper to build, some traditional venture capitalists are beginning to feel disintermediated. If you only need $250k, why raise it from a VC firm that treats it like an option and presents a boatload of signaling risk? Plus, do those old guys even get it?
The typical VC response is to emphasize past experiences. But that’s a lot like an accomplished 60 year-old jazz musician complaining that Kurt Cobain only knew three cords. It just doesn’t matter because, sometimes, three cords are all you need to rock.