Published on November 21st, 2011 | by Chris Heivly5
The Rise of the “Gentlemen VC”
Today’s local investing environment in undergoing change. Huge change. And we in the Triangle are not alone. This issue has been framed all around the country in the context of “the VC Model is Broken” discussion that has been going on for a few years now. What does this mean and how does it affect us as entrepreneurs, investors and friends of both?
Let me peel this back a bit.
Traditionally the local angel served as first money in a deal. And, as an angel, their role was to provide enough cash to bridge to some market validation point and deliver some light advice to help get this idea off the ground. We called this the seed round and if you were able to, you secured $10,000 to $50,000 from a handful of angels totaling somewhere between $100,000 and $250,000. The notion of board seats and formal corporate structures were pushed to later rounds and left for the professional investors.
Typical “A” rounds for software/tech companies these days sit plus or minus $500,000 – sometimes much lower. Ten years ago this would have been $2M to $3M. I spoke to David Ranii about this a few weeks ago which inspired this article from him. This would have been the round where a professional investor would begin to work his/her magic. But this cannot work today as there are very few VCs that can write checks as low as $500k with their fund structure (save that thought for a future post).
So – what’s the issue? You see, these lines are being blurred. The labels are becoming almost meaningless and the investor roles are being re-defined. The bottom line here in good old North Cackalacky is that angel investors are the new “A” round VCs.
They are filling the void left by professional investors – in effect serving as the new professional advisor. This is working real well in the Valley and other locations where both the volume of experienced startup angels as well as domain startup experience provides an awesome foundation for future investment success.
Maybe not so much here.
In my travels throughout our region, I am seeing the advent of the “Gentlemen VC.“
The term gentlemen farmer refers to “a man of independent means who farms chiefly for pleasure rather than income.” A seriously talented local VC and I were talking about this a while back and the phrase “Gentlemen VC” was bandied about to over-illustrate this issue.
Now, don’t get me wrong – these investors want to generate a return. I also have to add that their intentions are generally pure (though in a small community I worry about investors investing in competing companies). See this great post by Fred Wilson. The point here is that some of our angels are filling the investment gap (yea) left by VCs but operating without the professional investment experience needed or required to serve the role well (ouch). There is a certain maturity to a company at the “A” round – and a subtle yet critical understanding of how to help propel this company through this stage of startup adolescence.
To further exacerbate this issue, our local professional VCs are doing what they should do – investing up and down the eastern seaboard looking for great investments that meet their investment charter.
None of this helps draw together our ecosystem as hot startups like adzerk go outside the area for funding, advice and leverage.
What do you think?