We all know that funding markets have changed for startups. The trends are well understood: more angels, more seed funds, more crowdsourcing and so forth. We all can intuit the benefits to founders of these trends so there’s little reason to elaborate. What is less understood are the consequences of these changes.
I have blogged about some of the downside consequences of the changes and the private information I have says the consequences are much worse than is reported in the press since few people publicly talk about
1. How founders get screwed on convertible notes
2. How party rounds can burn you if it takes time to find your groove
There’s another issue I can add to your list of things to be aware of – information rights. Generally speaking in venture capital financings the legal documents will specify that only “major investors” (a threshold set in the agreement – which can be $500,000 investor or more). There is a reason for this. In a funding round with 1 or 2 VCs and 15-20 angels or 4-6 seed funds if you gave every investor you financial information and performance metrics your proprietary information would increase in its probability of leaking out.
But shouldn’t an investor who has given you $50,000 of his or her hard earned money be entitled to know how you’re doing? Yes. And no.
I am generally a fan for providing management updates periodically for all investors but in doing so you must assume that what you send out will get read by others and thus hold back on your most sensitive information.
Prorata rights are one of the most important rights of private market technology investors and yet are seldom fully understood. They often create the biggest tensions between investors who are investing at different stages in the business.
politics of money by bastera rusdi on 500px
These tensions seep out in some angels or seed funds publicly or semi-privately deriding later-stage VCs for their “bad” behavior. I have seen bad behavior from later-stage VCs, believe me. But I have seen equally bad behavior from super early stage investors.
As always a balanced perspective is in order. Here’s what you need to know.
1. Why investors care about prorata rights
Prorata investment rights give investors the right to invest in a startup’s future fund-raising rounds and maintain their ownership % in the company as the company grows and raises more capital. This is important for nearly every institutional investor because once you have 25-50 investments being able to “follow” the investments that are working well is critical to making money. It’s why
By all measures the past year has been successful. Teams that I’ve backed have sold their companies to Disney, Apple and AOL for substantive amounts of money. Founders have done very well, our fund has done well. Exhibit: Champagne and celebrations.
But the truth is that selling a company doesn’t always feel like a celebration as a VC. Not being a baby about it – my job is to return money to LPs. But I’ve been thinking about what had me a bit down about selling Maker Studios, Burstly and Gravity. Each of those teams were family. And the family extended beyond just the management team to include investors and the boards.
The more I’ve internalized things I’ve come to see selling a company like graduating high school or college. One day you have these great friends that you talk to all the time, you deal with tons of personal issues and drama, you have highs and lows but dammit – you were there together. I went from weekly (sometimes daily) phone calls with senior members of the team or other VCs. And now we barely see each other. And I miss those interactions. I miss those friends.
We’re all still friends but it’s not the same. Life moves on. You graduate.
Somehow the world seems to be spinning faster these days than just a few years ago. The frantic pace of technology cycles, the amount of tech news, the blogs, the conferences, the demo days, the announcements, the fundings, the IPOs. It’s exhausting. Perhaps unsustainable.
It got me thinking about the advice that I often give to new VCs. For years I saw myself as the new guy in VC but then you wake up one day and realize that 50% of your peers have been doing it for less time than you and time has moved on.
Any longtime readers of this blog will know that I often try to simplify complex ideas into a simple parable that is easier to remember to set the tone of one’s behaviors. Lines, Not Dots. Attitude over Aptitude. Building Startups for Basecamp. And so forth.
There has been much discussion in the past few years of the changing structure of the venture capital industry.
On the surface the narratives have been
The rise of “micro VCs” or seed-stage funds
The rise of alternative sources of capital (crowd funding and the like)
The poor performance of the asset class (this analysis has largely been wrong as I pointed out here –> most analyses were clumsy rear-view mirror looks at the data)
We are in a bubble (with so many private $1bn+ valuations)
15 years ago we were at the peak of Internet hype with the launch of many over-capitalized businesses with a market size & opportunity was limited.
Where are we today?
50x more Internet users (2.4 billion)
Online connections that are 180x faster (10.
I was having dinner with a friend last night and we were chatting about venture capital and a bit about what I’ve learned. I started in 2007 with a thesis that my primary investment decision would be about the team (70%) and only afterward about the market opportunity (30%).
I was telling him that it was much easier when I started because there were fewer deals, life was less public and somehow the world seemed to be spinning more slowly. A year into my tenure the world went into economic collapse and that seemed to dominate the consciousness more than which deals one was chasing.
Today we’re in a world where 10 accelerators are bombarding you with emails to meet their 10-15 companies. Seed investors are aplenty and of course they need downstream money to fuel their early-stage bets. Angels have been prolific for years now and they, too, rely on downstream money to cover their bets.
And we live in public so many people are able just to reach out.
And there’s conferences. Oh, the conferences. Disrupt. Recode. Web Summit. Collision. Fortune Brainstorm. Lobby.