links for 2010-10-09

  • Recently there has been a food fight in Silicon Valley over the behavior of certain Angel investors. Perhaps you’ve seen some of it playing out in the blogosphere. Riveting stuff to be sure. What gets me though is that a lot of the angst seems to center on whether leading Angel investors are acting like VCs or Angels. My first thought was “well, who cares?” But, on reflection, I thought it was revealing of a continued disconnect in the usage of these terms, and what they actually represent. I think that it is important to clear this matter up because as I have mentioned many times over the last four years, the VC industry is bifurcating. One part of the industry focuses on raising and managing larger funds, and providing expansion capital for software businesses and capital for intellectual property driven businesses that require significant capital investment to get to market. These funds seek exits of $200M or more,
  • When I first read Paul Graham’s blog post on “High Resolution” Financing I read it as a treatise arguing that convertible notes are better than equity. As I’m generally a believer in ‘pricing rounds’ I initially didn’t agree with the premise of the post. I just re-read it and on second reflection, I’m surprised just how much I found myself in near TOTAL agreement with Paul. Having re-read it, I believe his real premise instead is, “Fixed-size, multi-investor angel rounds are such a bad idea for startups that one wonders why things were ever done that way.” On this assertion, for the reasons that Paul articulates in his post, I’m aligned. Not that they’re “such a bad idea” but more that there are inherent problems for entrepreneurs in the process of raising angel money that need to be addressed. Here’s where I feel common ground :
  • If you find yourself in a market transaction and don’t know for sure that you are the wolf, then, sadly, you are the sheep. One of my favorite business school professors, Andre Perold, used to like to say that in ever transaction in the financial markets, there are only two types of actors: wolves and sheep. As you might expect, the wolves have the edge in the encounter, due to superior market information or negotiating position. Venture capital investors are historically accustomed to being the wolf. During most periods, there has been a supply and demand imbalance that favors the VCs. Entrepreneurs needed a lot of money, there were only a few VCs with money (it’s a shockingly small industry, with less than 500 or so active firms, according to the NVCA), and the VCs got to sit back and leverage their position of superior information and insight to choose their deals and drive favorable terms.

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