What I *Would Have* Said at TechCrunch Disrupt

Posted on Sep 27, 2010 | 80 comments


What do you get when you combine 7 panelist plus one moderator on to a stage for 30 minutes to talk about a serious topic?  Answer: Not much. And that was evident on today’s Angel vs. VC panel.It’s a shame.  There are real changes in the venture capital industry and it would have been fun to talk about them.  I said almost nothing in the 30 minutes.

My friend Ethan Anderson put it best to me after the panel, “You probably shouldn’t have been up there.  There was a fight going on and it’s clear that you were neutral and didn’t have a dog in the fight.  Maybe you should have moderated, but that’s likely why the panel went how it did.”  I think that’s about right. Perhaps I shouldn’t have pushed to be on the panel in the first place.

If given a chance here’s what I would have talked about:

1. The VC industry is segmenting – I have spoken about this many times before. The VC industry has different segments in it that have different fund sizes, different investment amounts and different risk / return expectations.  That’s a good thing.  I wrote about it here (mostly starting at point 7) and Chris Dixon wrote a great post about it here.  We need people at all stages of the funding lifecycle and not just VCs.  We need venture debt, factoring companies and public markets.

2. Industry change allows the entry of newer players at earlier stages – It doesn’t take as much money to launch a startup anymore. We all know that. You have an open source stack, cloud services for storage, processing & management and APIs for just about anything you want. So what took me $2 million at my first company now takes $20,000.  So in the past we needed VC to really get a startup going.  These days that’s not the case and it’s a great outcome for entrepreneurs and for innovation.  A new group of investors have clustered around writing earlier-stage, smaller checks. That’s awesome. And people like Jeff Clavier, Aydin Senkut, Dave McClure, Chris Sacca & Eric Paley (at Founder Collective) are leading the charge.

3. There is no such thing as a super angel, only “micro VCs” - Ron Conway said what I had been preparing to say, “there’s no such thing as a super angel.”  Either you’re an angel or you manage professional funds.  Period.  If you’re an angel you invest your own money and you have nobody to answer to except your spouse.  And you can have ulterior motives like helping people or being involved with “cool stuff.”  If you’re investing other people’s money you’re a professional money manager.  If you invest it in startups you’re a VC professional money manager.  Now we can call you a seed-stage VC or a micro VC.  We can even acknowledge that you might work differently than traditional VCs.  But you’re not an angel.  So I wish this separate definition would go away.  Stop to think about it, why would a super angel act more like an angel than a VC?  A: Only because it’s a nicer branding for entrepreneurs.  That’s all.  You still have a fiduciary responsibility to your investors (LPs) to maximize returns.

4. Some companies should raise less money and consider early exits – We had a discussion about whether companies should raise less money and have smaller goals for an exit.  Dave McClure argued passionately that since the overwhelming majority of exits are sub $100 million we need to readjust how much capital goes in.  Chris Sacca talked about how a $20 million exit can change a founder’s life and that shouldn’t be scoffed at.  I totally agree and have been arguing this to entrepreneurs for years.  I used an analogy I heard from Michael Dougherty (founder of Jelli) recounting what First Round Capital told him, “sometimes you’re on the local train and sometimes you’re on the express train.  The express train might get you there faster but there are no options to get off along the way. The express train represents raising a large VC round before you’ve figured out whether you can be big.”  I agree.  I always counsel young entrepreneurs to start on the local train.  You can always upgrade if you sense that you’re on to something big.

5. Others should swing for the fences - Some companies are designed to be big, industry changing plays.  It’s nice to see entrepreneurs who still dream of doing big things.  That doesn’t mean raising huge sums up front but when you’re on to something then you step on the gas.  I would never go into an investment where the entrepreneur was talking about a $20 million exit up front.  That may be a great return for him/her but for a venture investor it’s not.  That person would be better off raising angel money or no money.  And that’s honestly OK.  It’s just not a VC investment.

6. Outsized returns are produced by having a few big winners. You can’t average your way into VC success – Dave McClure talks with such disdain about venture capitalists that I think he misses the broader point.  I understand why he wants to differentiate himself but I wonder if a scorched Earth strategy against the main funding source for your company pays in the long run.  What micro VCs need to consider is what happens when several of your companies want to grow and require VC financing?  Or when the economy turns downward and they all need financing extensions?  You might be able to get several $20-50 million exits in a good exit environment but I doubt that will drive outsized returns and cover all of the busts.  In most funds the outsized winners return the fund (or a large portions of it) and if you get a few of these you’re doing really well.  When I look through our own returns across our many funds it has always played out this way.  Our biggest winner from our last fund returned a total of $320 million to our investors across two funds.  You can’t average yourself into VC success.  You have some big winners and some losers.  And I think that’s what Michael Arrington was getting at when he was pointing out Sequoia’s $12 billion in exits in the past few years.

7. In my heart I believe in ‘founder liquidity’ and always will – I have written about this extensively so if you want a deeper dive it is in my post on “The Entrepreneur’s Thesis” or “Should Founders be Able to Take Money off the Table?”  I was a founder once.  I had two kids and a rental house.  My wife worked at Google so while we had good income in Silicon Valley it’s hardly the life of luxury given the costs of housing.  And then you think about these millionaire VCs flying private jets, kids in private schools and vacationing in exotic locations talking about swinging for the fences.  It is such a disconnect.  If the company is moderately successful, growing and has great prospects for the future then a small liquidity event will help founders & venture capitalists to be aligned.  The hardest thing is deciding what the right time to allow founder liquidity is. I discussed it in my post on the topic linked above.

** One small note: many VCs who got into the industry in 2001 or later have never seen a “carry” check. So many of the younger VCs who weren’t part of the heyday (late 90’s) and who weren’t successful entrepreneurs first have never had big liquidity.  It’s just worth pointing that out. I think most entrepreneurs don’t realize this.

8. Price creep hurts investors. But it also hurts entrepreneurs – Mike asked people about what they were doing to keep prices down.  It was obviously a joke and a reference to the supposed Bin 38 meeting.  There is no way for people to keep prices down – it’s a competitive market.  This is evidenced by the current price creep that we’re experiencing for early-stage deals.  The only solution as an investor is to sit the market out as Chris Sacca said he’s inclined to do.  At GRP we sat out 2007 and much of 2008 for that reason and we’re now looking pretty smart for doing so.  We picked up activity aggressively in 2009.  In public investing you can get in and out even in a bull market.  VC is different.

What I wanted to say, but Michael cut me off (hey, it’s his show!) was – it can actually be a problem for entrepreneurs to raise at too high of a price. We saw this with VC backed companies in 07/08.  They raised at $40 million pre-money for pre-revenue companies and when the economy corrected it became hard for them to refinance themselves.  You have to be careful about “getting ahead of yourself” or you make the next financing more difficult.  If you do a $1 million angel round at $6 million pre-money and hope to do a Series A round for $2-3 million that’s fine as long as you’re doing awesome against your metric goals and the market continues to be frothy.  If either condition doesn’t hold it will be hard to do anything but a flat or down round.  I leave it to every entrepreneur to decide but just go in armed with the thought exercise about a multi-stage investment process over time and under different market conditions.

And finally, one non VC topic.

9. Panels stink – I’ve written twice about sitting on panels and how to make the most of it.  They are here and here.  It basically boils down to: educate, entertain, have a dialog, don’t be boring and don’t sit on large panels (doh!).  But I wrote about one other point that I wrote back in March 2010 so it’s clear I didn’t just dream this up after today’s panel.  But I certainly could have written it about today.  Succeeding on a panel is about pleasing the audience AND your fellow panel members (at least the ones you respect / like).  No prizes for guessing who I’m talking about here (yes, I was annoyed).  So here it is, your moment of zen, from March 2010 …

“Hogging minutes – The other annoying thing on panels is the “over talker” or the person who always has to answer the question first (the way that annoying kid did back when you were in elementary and high school).  Don’t be a wall flower – you should get in your minutes.  But don’t crowd out other people.  If your goal is to sit on panels with important people and build a relationship with them you won’t achieve this by not letting them speak!  (you might think you won’t do this either by being controversial – I think if you learn to do controversy with humor and tact it’s OK.  Just my view.)  Also, when it’s your turn to speak don’t speak for too long in any one question.  People prefer snappy answers to questions.”

  • http://twitter.com/Jakewk Jake Kaldenbaugh

    Mark, you should have done your homework on point #9 — Dave is INFAMOUS for hogging and overtalking. It's what he does. You should've seen him do it to Hornik and Clavier last week at the Orrick event. Don't whine about known commodities. ;)

  • vidar_masson

    Come on, tell the name for those who didn't see it… :)

  • http://jackndempsey.blogspot.com/ Jack Dempsey

    Great stuff Mark. I struggle to find time to get blog posts written with my busy schedule, and I'm constantly amazed at how guys like you, Fred Wilson, and others just constantly produce without sacrificing quality. Appreciate it.

  • http://influads.com/ damiansen

    what a sad waste of a potentially interesting outcome.

    One question about founder liquidity: Could an increase in base salary (or a loan from the company to the founder) replace selling shares early, specially when new rounds of investment end introducing liquidity and ability to acquire some debt?

    If so, why is selling shares early by founders the topic under discussion?

  • http://www.facebook.com/people/Marcus-Ogawa/697839876 Marcus Ogawa

    Well formed and solid opinions. Thanks!

  • dshen

    mark, stick to blogging. it will save all of us $1000s of entry fee to TCDisrupt and all those other conferences where we really don't learn very much anyways, but really just spend our time drinking at the after parties. we get better info from your blogging anyways…LOL

  • http://www.slackbrain.com sam schillace

    I strongly agree with this, especially points 3 and 4. I've almost always felt that VC is overused in the valley – too many people do it for ego or other reasons. It's a means to an end, and you should be clear about what your goals are. Not all companies will be big enough to be worth investor time and money, but there can still be interesting things to do with them. And your comment about VC versus Angel is spot on – if they have LPs, no matter what they are, they're a VC because they have to pay attention to that constituency.

    BTW, I came away from that panel with a very bad taste in my mouth. It just seems like something jumped the shark here, I don't know what it is. But it made me not want to have anything to do with a lot of this nonsense.

  • http://www.homethinking.com nikiscevak

    Mark, I'd be interested in your thoughts around valuation creep. With the first round of investment today what is pushing the boundary? If $1.5-3m was an average pre-money in 2006/7, what's an average pre-money now?

    Shouldn't another factor in the valuation creep be the Series A round (because the angel round is increasingly a convertible note) and that being more important than ever? That is, if Series A valuations – determined mainly by VCs – are kept in check, then the angel valuations aren't really climbing at all?

    So the only way there can be a valuation creep is if venture guys buy the optimism of the angels?

    Also, if there are so many convertible debt deals out there, how many wont actually convert? Could it be with capital efficiency of the businesses and early progress, they'd actually pay back the debt like a loan to get even greater dilution protection?

  • Guest

    Agreed. I think if Mark decides to be pragmatic (rather than charitable) he would adopt a policy of declining every future panel. As a guy who's sat on multiple, being a panelist does not add cred anywhere near what writing and keynoting and interviewing does. The meaningful contribution simply isn't there.

    The only people that see a social ROI from panelists are unknown contrarians. Jason Fried c. 2006.

    If you're already an opinion leader with a better venue than the time required simply doesn't justify it.

  • http://www.phaseclarity.com Dale Allyn

    Thanks, Mark. Good post.

    From what I could tell by reading the partial transcript of the panel discussion, it was pretty lame in terms of moderation and direction. A wasted opportunity.

    BTW: I like your take on the VC vs. Angel titles. Pretty common sense stuff it seems to me.

  • Fred

    2007 was our best year. We did twitter Zynga and tumblr that year

    Don't sit out years. Just set a pace and keep to it. Don't deviate. You can't time markets or tech cycles

  • Jayant Kulkarni

    Mark,
    From a purely numbers perspective isn't it always better to raise at the highest possible valuation at every stage? I can understand that psychologically of down/flat round can be tough but I often see the advice that entrepreneurs should not raise at too high a valuation because the next round can be down and I don't understand the logic. Are there any purely numbers reasons to do this?

    If not, wouldn't it be better to advice entrepreneurs to be psychologically prepared for a down round in the future instead of asking them to take money at a smaller valuation for the good feeling of raising the value at a later round. The higher valuation at the next round would essentially come out of their pocket if they followed this advice.

  • http://twitter.com/jcbruin Jon Chang

    Thanks Mike for writing this. I just caught up on the TC Disrupt segment (replay) and it was quite a waste of time. Thanks for taking the time to voice your opinion and thoughts through this post.

  • http://www.postlinearity.com gregorylent

    tcdisrupt disrupts nothing … except sanity, perhaps … old-paradigm all the way … so new thinking will come from it

  • Aviah Laor

    It's true for markets too. Some of the epic recoveries happen in a single day, and if you missed that specific day you are screwed.

  • http://twitter.com/jkaljundi jkaljundi

    Mark, why not do one of the TWiVC episodes with 2-3 VC/angel guests on these topics. 60 minutes and no interruptions, guests allowed to say what they think.

  • brezina

    Very refreshing Mark. Thank you.

  • daytulu

    It is definitely a missed opportunity, the panel could have worked if it was a 90 minute session (minus the AngelGate). For entrepreneurs outside of Silicon Valley, the angelgate is noise. OK, maybe I should say it is “an entertaining read” for surfing breaks (market research). The bottom line is, if I had an investor who was involved in this, I would be disappointed as an entrepreneur. Instead of wasting time, he/she could have made few more introductions, give feedback on company issues etc.

  • cdstern

    Great post, from all the investor blogs I've read, you seem the most fair. I'd like to see who you would invite to your panel and what topic you would choose.

  • http://www.jasonwolfe.co.uk/ Jason Wolfe

    I wish you were interested in smaller entry points Mark. Everything I've read from you (and things told to me by mutual acquaintances) makes me think I, and many others like me, would prefer to have someone as balanced, deep-thinking and mature (in the right way) as you are as the source of finance and advice.

  • http://bothsidesofthetable.com msuster

    ;-) not sure I was “whining” just stating the fact that it was fucking annoying

  • http://bothsidesofthetable.com msuster

    Yes, financial pressures can be relieved by salary increases, loans or founder liquidity.

  • http://bothsidesofthetable.com msuster

    Thanks, David ;-)

  • http://bothsidesofthetable.com msuster

    Yes, it was nonsense. I really enjoyed meeting with you today. I'd love to stay in touch.

  • http://bothsidesofthetable.com msuster

    No, convertible debt converts. It isn't likely that it would be paid back. Investors wouldn't allow this. On Series A – for a “hot” deal you can get the VC round done at a mark-up to the angel round (even when expensive). If not hot, you run into the problems I discussed in the post.

  • http://bothsidesofthetable.com msuster

    Yes, it was lame and a wasted opportunity.

  • http://bothsidesofthetable.com msuster

    Thanks, Fred. I don't want to imply we weren't actively looking at deals – we were. But most were overpriced relative to our expectations. We submitted a few terms sheets but were outbid. In the end we were OK with that. Obviously I would have loved to have Zynga, Twitter & Tumblr! but as a new VC since Sept '07 those types of deals weren't available to me back then.

  • http://bothsidesofthetable.com msuster

    It's not about founder psychology – it's investor psychology. They see a deal that is a “down round” and start by thinking that the company under-performed and something is wrong. They can be won over but the starting premise is hard to overcome.

  • http://bothsidesofthetable.com msuster

    great idea!

  • http://bothsidesofthetable.com msuster

    Thanks, Jason. I do invest $250-500k. But at this stage it's almost exclusively in SoCal where I can be close to the management team.

  • http://twitter.com/timothypost Timothy Post

    Mark: I would suggest that there may actually be a category of investor, which we could appropriately call “Super Angel.” This Super Angel would invest his or her own capital, would not accept any management fees from limited investors (and wouldn't – of course – professionally manage a fund), and would serve as the de facto lead investor in an informal syndicate of other angels.

    While Dave McClure or Ron Conway would not fit my description of a Super Angel, there are perhaps others out there who would qualify. A couple names which come to mind are Kevin Rose or Tim Ferris. The key distinction in my mind is not only one of how much s/he invests but the level of “social proof” (which I learned about on your fantastic podcast (http://thisweekin.com/thisweekin-venture-capital/) that this Super Angel can generate.

    Obviously, if one is a Super Angel (i.e. can persuade others to join him/her in seed investments) then the natural progression would be for that person to then become a Micro-VC. In my mind there is absolutely a category called Super Angels.

    Your thoughts?

  • http://www.victusspiritus.com/ Mark Essel

    On the point of funding, I read some great advice from Jessica Mah's blog (founder inDinero). She said to treat every round of funding as if it's your last (Paul Graham's advice). Her company had customers and revenue before funding and it's in a an interesting position as simple financial SaaS.

  • http://www.fiftybyfifty.com/lifeoffarhan/ Farhan Lalji

    Mark, totally agree with you on founders liquidity events and feed the family money and I get your points about the VC industry and carry but I just wonder what a founders salary is like compared to a VC's salary, maybe instead of liquidity everyone can agree on bumping founders salaries in a round so they can feed the family off this.

    As a guy with a family bootstrapping it's really difficult to plan how much money I can pay myself and my founding team in later stages, would be great to have some guidance on this.

  • Dave W Baldwin

    You're right…made for an interesting read. Actually, the comments were helpful for studying profiles.

  • Dave W Baldwin

    Guess he is annoying as someone I know ;D

    When I get the time, will watch the thing…can only imagine.

    Told my partner if I were to contact him, I'd start with (read fast), “Shit, tit, ass, mother fucken', son-of-a-bitch….ok, now that we've established a common language….”

    Your work is appreciated Mark

  • http://donaldryan.net DonRyan

    Either you're an angel and playing with your own money or a VC and managing someone else's. Brilliant, brilliant point that has been lost within the echo chamber the last several months.

  • dshen

    As an investor, you are right that we fear a payback if another financing has not occurred before the note is due. But many notes now have evolved to have options to convert when note comes due, on option of note holder (or majority vote of note holders).

  • Florian Feder

    Thanks Mark, I agree with many others that you write the best posts about what’s going on in the VC/angel business. I’m new to the business, and since starting to follow the start-up scene I have been amazed what angels and VCs get away with. It seems like criticism is finally boiling over and a lot of people realize that not everything is how it is supposed to be.

    What still surprises me, though, is that while people start to understand the deficiencies, if you will, of VCs and angels, Wall Street and traditional banks are still portrayed as the true devil. VCs and angels engage in a very simple and century old business model: invest money in a venture and request a return that is in proportion to the inherent risk of the venture. Wall Street and America’s traditional banks have done this for a long time very successfully. In fact, America is built on their expertise. They excel in exactly what VCs and angels are offering: Take capital from those without ideas and give it to smart people with ideas. That is how America became what it is.

    Now, Wall Street bankers might be a little annoying in their own way, but they are certainly not as obnoxious as guys like Dave McClure. And they work just as hard as angels purport to do, because they only make money if their clients make money, just like angels do.

    What I am trying to say is that “merchant banking” is an old and simple business. Wall Street does the job better than anybody else in the world. So why leave it up to amateurish “super-angels” who embarrass the industry?

  • http://twitter.com/defrag Defrag/Glue

    Mark- Great post. 2 things:
    1. There are only 2 reasons that a conference organizer would put 7 panelists on a stage for a 30min slot –
    a) they're padding their room block numbers (the hotel room nights they're contracted for)
    b) lack of editorial discipline (and a mistaken notion that more big names=better content)

    2. you've got a standing invite to defrag (http://www.defragcon.com) — not sure where I'd put you on the agenda, but that's my problem not yours. ;-)
    ejn

  • http://1000markets.com Matthew_Trifiro

    Thank you for your recent series of blog posts. These are legacy contributions. They will be read and absorbed by entrepreneurs and other VCs for years.

  • http://www.logicalconsensus.com Lucas Dailey

    Only Dave McClure could marginalize Yossi Vardi.

    It was painful to watch, for the exact reasons your friend Ethan said at the top. The most frustrating part for me watching it live was that Mike seemed intent on preventing any great discussion from breaking out.

    Thank you for elaborating here, for the education and closure ;)

    Incidentally, it made a great case for who I'd want in a heated board meeting, Mr. cool and collected.

  • http://1000markets.com Matthew_Trifiro

    I have never heard of a convertible note being paid back except in a liquidation event. These things want to convert; they are not really designed to be paid back.

    If a note doesn't convert, it really means the bus hit the wall. Loans get paid back preferentially, so the investor will basically end up owning your company. As an entrepreneur, this is often an acceptable risk.

  • http://twitter.com/jpball John Ball

    Mark thanks for this post. Like @fredwilson and a few others, you are contributing to the community dialog, reinforcing the importance of the business and the entrepreneurs, and avoiding the hubris that appears to have taken over my Twitter feeds.

  • http://bothsidesofthetable.com msuster

    I can buy that but it's not the category we talk about now so the definition has been taken already. But there are people (Jarl Mohn in LA, for example) that meet the definition of Super Angel as you laid out.

  • http://bothsidesofthetable.com msuster

    Boosting salary is OK, but obviously it's at a higher tax rate and doesn't provide the sort of lump sum that allows somebody to put a down payment on a house. Salaries for different companies is totally dependent on location. An LA startup salary would be different than that in Austin, Miami or Detroit. Or London.

  • http://bothsidesofthetable.com msuster

    Well … I see it slightly differently. While some of the Micro VCs (fka Super Angels) are louder & more visible than others in the industry – I actually see them doing a lot of good behind the scenes. Wall Street, on the other hand, had a clear case of people drifting from the normal “merchant banking” tradition and getting into highly leveraged bets where if they paid off they made HUGE sums of money and if they didn't pay off – we lost. Just read The Big Short for a glimpse. Certain companies made money by simply exploiting known errors in the Standard & Poor's credit analysis model. And these large bets had a direct impact on the housing market.

  • http://bothsidesofthetable.com msuster

    Love to come to Defrag – as long as it's not a panel ;-)

  • http://bothsidesofthetable.com msuster

    thank you

  • http://bothsidesofthetable.com msuster

    Yossi made tons of whacky comments, “the difference between making love to a woman verus making love to a government” that weren't relevant or topical. Was strange.

  • http://bothsidesofthetable.com msuster

    thank you