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VC Syndicates: How Many VCs Is Too Many?

20 points by bjonathan 16y ago

marknutter 16y ago
1
lkrubner 16y ago
Fred Wilson writes: "The pile on seems to be gaining attraction for both entrpreneurs and VCs. But I don't think it's the best way to finance your company and hope that our firm can avoid them." I get that the VCs themselves might like to have more control over what they are investing in. The entrepreneurs, however, usually feel that they know best what their startups need. From the point of view of the entrepreneur, one way of retaining control of one's company is to be sure each VC has only a small slice of the company. Most of us who have been following the startup scene for awhile remember what happened to Phillip Greenspun, and the clever way the VCs were able to take his company away from him. Most of us who are thinking about starting our own startups want to avoid that fate. And I think there is a much larger context that should be considered. The USA went into recession in December of 2007, and in September of 2008, it suffered a financial crisis that caused markets all over the world to seize up, leading to the worst post-war recession in the USA, and triggering crisises in many other countries. The point is this: yields have collapsed. Last week, 30 year USA Treasuries traded for 3.676%. Think about it. If you would like to give the government a million dollars, the government will happily give you $36,760 a year for the next 30 years. (Several key rates hit all time lows last week.) If you would like to get so rich that you can live comfortably on your asset income forever, you will need… uh, wow. Being a millionaire is not what it used to be. The amazing thing here is not the low rate, but that this is for 30 years – anyone who buys at this rate is essentially investing in the idea that inflation will not return to the USA for several decades. Honestly, my mind staggers at the implications. In this context, it is not surprising that we might get a glut of VCs, a glut of equity funding, and VCs having to settle for small slices. Startups are one of the only things in the world that can still promise the possibility of exciting returns. If I was rich, I’d be out chasing yield too. And I'd be willing to settle for just a slice of a startup. I'd be putting my money into VC funds, hoping to find a way to get better than a 4% return. I do get the argument that the best VCs offer a kind of guidance that goes way beyond the value of the money they invest. But my point is, a glut of money chasing yield must lead to a glut of VCs, and that means most VCs will not be at the level of Paul Graham or Fred Wilson. Most VCs will be somewhat mediocre. The more money that sloshes into the VC market, the more new, inexperienced VCs there will be. Their money will, in fact, be the main thing they have to offer.
davidu 16y ago
There's a big difference between syndicating with VCs and syndicating with Angels. With VCs, everything Fred writes holds true -- they will crowd out future rounds and create other unbalanced dynamics. With Angels, however, they are used to being minority position holders and will encourage the introduction of later stage VCs, should your company require it. That's one distinction that I think is worth pointing out. The other is that my experience with my investors (Sequoia and Greylock and Minor) is that each of them would have preferred to be the only investor in the deal if they could have. I'm quite happy with the balance I ended up with, but it could have been a very different outcome.

20 points by bjonathan 16y ago

Fred Wilson writes: "The pile on seems to be gaining attraction for both entrpreneurs and VCs. But I don't think it's the best way to finance your company and hope that our firm can avoid them." I get that the VCs themselves might like to have more control over what they are investing in. The entrepreneurs, however, usually feel that they know best what their startups need. From the point of view of the entrepreneur, one way of retaining control of one's company is to be sure each VC has only a small slice of the company. Most of us who have been following the startup scene for awhile remember what happened to Phillip Greenspun, and the clever way the VCs were able to take his company away from him. Most of us who are thinking about starting our own startups want to avoid that fate. And I think there is a much larger context that should be considered. The USA went into recession in December of 2007, and in September of 2008, it suffered a financial crisis that caused markets all over the world to seize up, leading to the worst post-war recession in the USA, and triggering crisises in many other countries. The point is this: yields have collapsed. Last week, 30 year USA Treasuries traded for 3.676%. Think about it. If you would like to give the government a million dollars, the government will happily give you $36,760 a year for the next 30 years. (Several key rates hit all time lows last week.) If you would like to get so rich that you can live comfortably on your asset income forever, you will need… uh, wow. Being a millionaire is not what it used to be. The amazing thing here is not the low rate, but that this is for 30 years – anyone who buys at this rate is essentially investing in the idea that inflation will not return to the USA for several decades. Honestly, my mind staggers at the implications. In this context, it is not surprising that we might get a glut of VCs, a glut of equity funding, and VCs having to settle for small slices. Startups are one of the only things in the world that can still promise the possibility of exciting returns. If I was rich, I’d be out chasing yield too. And I'd be willing to settle for just a slice of a startup. I'd be putting my money into VC funds, hoping to find a way to get better than a 4% return. I do get the argument that the best VCs offer a kind of guidance that goes way beyond the value of the money they invest. But my point is, a glut of money chasing yield must lead to a glut of VCs, and that means most VCs will not be at the level of Paul Graham or Fred Wilson. Most VCs will be somewhat mediocre. The more money that sloshes into the VC market, the more new, inexperienced VCs there will be. Their money will, in fact, be the main thing they have to offer.

davidu 16y ago

There's a big difference between syndicating with VCs and syndicating with Angels. With VCs, everything Fred writes holds true -- they will crowd out future rounds and create other unbalanced dynamics. With Angels, however, they are used to being minority position holders and will encourage the introduction of later stage VCs, should your company require it. That's one distinction that I think is worth pointing out. The other is that my experience with my investors (Sequoia and Greylock and Minor) is that each of them would have preferred to be the only investor in the deal if they could have. I'm quite happy with the balance I ended up with, but it could have been a very different outcome.