Venture capital is a private asset class that has a greater global supply of dollars than great startups where those dollars can be put to good use. The private and globally oversupplied nature of venture capital (there are pockets of undersupply in some emerging markets like Turkey) makes seeing and getting into deals as important determinants of success as the exercise of sound judgment when evaluating companies.
And seeing and getting into deals is not only a function of the success of the companies you invested in in the past, but also your reputation in how you dealt with these companies.
Your reputation, in turn, is at greater risk when things go wrong than when things go well. The reason is that, in the former, there’s more to correct, including that which often requires stepping on some people’s toes, as well as more blame to go around.
That’s why I really like this quote from Andreessen Horowitz’s Marc Andreessen:
“We make our money on the [startups] that work and we make our reputation on the ones that don’t.”
In April 2015, after AngelList launched pre-funded syndicates, I published a post about AngelList’s future direction. In the post, I wrote that “I wouldn’t be surprised if syndicate leads first remove an investor’s ability to opt out of investing in specific startups, and then start raising an aggregate amount of capital to invest in a number of startups during a fixed period of time (a fund) rather than on a deal-by-deal basis. In other words, AngelList may become the very system it was looking to displace.”
Fast forward 2 years and AngelList announced that it is indeed beginning to launch new VC funds on its marketplace. The fund sizes are small for now (sometimes as small as $0.5M-$1M), but will likely grow larger as the model begins to show results. This will attract more institutional capital like Bain Capital Ventures which is already backing some of the new funds. The funds are also beginning with a fixed 1 year life, but once again this is also likely to grow longer as the model is proven to work.
What I did not predict was that the general partners of these VC funds would primarily be current operators. This is the natural result of AngelList decoupling a general partner’s ability to add value from their ability to raise money. This favors current operators whose experiences give them an edge in the former area while their limited time makes it challenging for them to do the latter.
However, AngelList’s new program is unlikely to be limited to current operators in the future. Anyone who has the ability and work ethic to add value to startups but could use some help with fundraising is a great candidate for the program.
The program will help shift the skills necessary to be a successful venture capitalist away from the ability to fundraise from limited partners towards the ability to add value to companies. And that will increase the number of successful startups, which is a good thing.
When you invest money in a startup, you actually invest a lot more than that. You embark on a journey which will likely take at least 18 months and maybe longer than 10 years.
18 months is the shortest path to a successful exit that I’ve seen. It’s also how much runway most funding rounds offer in the event of failure.
And if you catch on to a big winner you’ll likely want to see it play out for as long as possible so this may mean a journey longer than 10 years.
So, in addition to money, you also invest your time in a startup. You spend time strategizing with the founders, helping the startup recruit, pitching the startup to other investors, solving founder problems, but also problems among investors and between founders and investors.
And while money is replaceable, time is not. If you invest in the wrong startup, you spend the precious moments of a finite resource on a business that gets less and less likely to succeed each day. The feeling of lost time hurts a lot more than the feeling of lost money.
As a result, when I’m evaluating whether to invest in a company, I’m not simply deciding whether to invest money in the company. I’m deciding whether it’s worth investing time in the company.
This forces me to hold potential investments to a higher standard. And more importantly, it makes me spend a finite resource in the way that I believe will create the greatest value.