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Are Angels More Likely Than VCs to Drive Entrepreneurial Experimentation? [pdf]
- Layke1123 5y agoGovernment investment seems to provide the most bang for your buck.
- wkrsz 5y agoBased on your personal observation or some reading? If the later, can you point me to some sources?
- Layke1123 5y agoYes. The internet for one. Thats kind of the big one thats easy to point to. Other things like infrastructure is often over looked. The Hoover Damn provided so much power.
- MattGaiser 5y agoThat is blamed for some of the problems with tech in Canada and anecdotally, the government money drives a lot of strange behaviour. https://alexdanco.com/2021/01/11/why-the-canadian-tech-scene-doesnt-work/ https://alexdanco.com/2021/01/11/why-the-canadian-tech-scene...
- dt5702 5y agoAnecdata: I work at a uk startup and quite a lot of our product development has been funded by HMG. It’s worked really well for helping us work through technical challenges and has enabled us to reach product/market fit for our key products.
- shoo 5y agothe paper is focusing on experimentation in the context of commercial startups, but arguably more high-risk and potentially high-utility experimentation may happen in other contexts, such as universities, that tend to be largely government funded. consider silicon valley. government allocates funding for long-term high risk research programs toward various defence objectives. this funds fundamental research in universities. some researchers then spin off startups to develop products for defence applications -- so the government takes the risk to fund any long-term blue-sky research and then is also willing to as the first customer and provider of contracts for any startups that figure out how to industrialise/commercialise the research for defence applications (electronic warfare...). see e.g. https://steveblank.com/secret-history/ https://steveblank.com/secret-history/ similarly, consider the development of tcp/ip. pretty handy thing. no startup managed to capture the rights to tcp/ip and change rent to all users of the internet, so arguably from the perspective of commercial startups tcp/ip is a failure.
- personjerry 5y agoIs this analysis useful? My understanding is that the quality varies greatly from investor to investor regardless of being a VC versus an angel, and their reputation is the greatest indicator of how helpful they'll be. I'm sure an investor from Sequoia is going to be much more helpful than Random Joe Angel. So I feel like this is a field where individual characteristics are key, and this paper turning to statistics, generalizing over many angels and many VCs, makes little sense. What am I missing?
- shoto_io 5y agoThis is just anecdata: but I’d say yes. I had a number of friends trying to get VC money for things which haven’t been done before: either you gotta be someone already in VC space, eg a successful founder or you have to pitch an idea that’s been validated already somewhere for example. VCs are quite risk averse in my opinion, at least at the seed stage.
- CPLNTN 5y agoI had the same experience. A VC explicitly told me that he doesn’t fund any startup that is trying to create a new market, because he doesn’t know if that market actually exist and if it does he doesn’t know if it is profitable. Instead funding a startup that plays in an already existing market, as long as the startup does thing “better or in a unique way” is a much safer play.
- mrb 5y agoWe angels love to exploit what VCs won't touch with a ten-foot pole ;-) If you are a founder—any industry—hit me up and hopefully I'll fund you! Email m@zorinaq.com I don't care if I don't know an industry. I look mostly for qualities and unique characteristics in the founders themselves.
- 1cvmask 5y agoWhat do you look for in a founder and how is it fundamentally different to a VC? Any examples of investments you made. Some angels became eventually super successful and then set up their own VCs. Would that be part of your plan later on?
- cvwright 5y agoEmail sent. Dude you asked for it :)
- nikanj 5y ago"X, but with blockchain" seems to be be the new "X, but on the internet" for getting VC funding.
- Pandabob 5y agoInitially thought this had something to do with religion driving entrepreneurship, but (of course) it's about angel investing. Dumb brain.
- keiferski 5y agoThat’s pretty much what Max Weber’s thesis was. Have you read him? https://en.m.wikipedia.org/wiki/The_Protestant_Ethic_and_the_Spirit_of_Capitalism https://en.m.wikipedia.org/wiki/The_Protestant_Ethic_and_the...
- allenleein 5y ago99% of VCs are hype-driven business sheep, they are overly obsessed with the size of existing markets. Don’t get programmed by what they are promoting. The most successful companies don’t discover markets, they create them. If you need the venture $, find the 1%.
- onion2k 5y agohype-driven business sheep That makes them sound like something out of a Jeff Minter game.
- spoonjim 5y agoMost VCs are MBAs and can’t really evaluate technical risk. So they mostly get involved in companies where: you know you’ll be able to ship, but not how you’ll get users (an MBA skill) or you have some external validation of your credentials (eg you were a professor of quantum computing at MIT, fine, take $25 million and see if you can build a quantum computer).
- onion2k 5y agoIt's hard to raise a round unless you've done the experimentation already and proved your hypothesis. You really need to be on the other side of the experiment, with a proven business that has traction and revenue before many VCs and angels will talk to you seriously. 20 years ago you could raise a seed round with no more than an idea (I worked for a couple of businesses that did exactly that). Those days are gone.
- ToJans 5y agoExactly, in my experience - Europe - a VC is only interested in scale-ups... I am currently negotiating a buy-in for my SaaS, so for validation purposes I contacted a few VCs in our domain, and received a few replies stating they required at least 500k to 1 million ARR. It would be my assumption that - in Europe - you don't really need VC money if you're making this amount of ARR, unless your margin is so low, or you are growing so fast that there is a huge risk involved. To me getting VC money at 500k/1 million ARR sounds like a very expensive loan where the VC has limited risk (the investment) and unlimited upside. If I would be at that amount of ARR and in the need for some credit, I'd rather go to the bank and pay for a credit line for a couple of million that we can use when/if we need it, especially at the current cheap interest rates... Update - addendum: Just to clarify: I am a big fan of external capital if it also includes proper engagement, preferably an org that has a huge network and/or proper domain knowledge.
- kenneth 5y agoI think you misunderstand venture. VC has two broad categories: experimentation and growth. As a VC I'm happy to invest in a company with zero revenue, in the promise that they'll figure out something valuable. If I'm investing in a business that's figured it out, I'm looking for growth. The numbers don't have to be at a certain ARR level, but need to show strong growth. It's likely the business you're pitching has an offering, but the revenues are pretty flat or growing slowly. You're in that weird in between zone that isn't interesting to VCs. You need to keep iterating on the offering until you find something with the right growth potential, otherwise you're stuck just staying a small business.
- lordnacho 5y agoAren't angels normally principals, whereas VCs are agents? There's a heck of a big difference between investing your own money and investing someone else's. Your own money you only need to justify to yourself. Someone else's needs justifications that are socially viable.
- monkeydust 5y agoAs an Angel.Yes.I take bets VCs would not. Also it's not a business for me as it is for a VC. Yes of course I primarily do it for returns but a very close if not equal second is that i take pleasure from risky bets and giving entrepreneurs hope ,it's fun and I always learn something even if I lose money...and being in the UK the tax breaks are good at limiting the downside.
- k__ 5y agoInteresting. I would have guessed it's the other way around. Since VCs have usually more money on their hand, they can diversify more and take bets.
- monkeydust 5y agoWe both take bets. Yes they take far more than I do. I take more risky bets in the sense that I would fund pre-revenue companies (higher % lets say). Having said that recently there has been explosion on seed stage VCs trying to grab angel money directly and deploy to startups through funds with tax incentives. Not my thing, prefer to go direct, they have resulted in more inflated valuations and competition though but good for the startup not necessary your average joe angel like me.
- throwaway210222 5y ago> and being in the UK the tax breaks are good at limiting the downside. Pray tell?
- monkeydust 5y agoGood writeup on them here - https://seedlegals.com/resources/what-is-seis-eis-an-essential-read-for-uk-startups/ https://seedlegals.com/resources/what-is-seis-eis-an-essenti...
- Stratoscope 5y agoCan anyone translate this into language I can understand? > Experimentation is contrasted with another mode of learning that I term Analysis. Classical competitive strategy emphasizes learning through analysis (Porter, 1980) whereby, instead of generating real options, entrepreneurs generate option sets and arrive at a decision through optimization (see Delmar and Shane, 2003, for an example). In my study, analysis includes gathering market, product, and regulatory data or developing business plans. Gans et al. (2019) distinguish analysis from experimentation in two important ways. Analysis is “commitment-free” whereas in experiments some irreversible investment in the ideas being tested is inescapable. In turn, the commitment-free nature of analysis implies that it can only yield noisy information, whereas experiments produce high-fidelity signals. I add a third difference, which is that analysis, in and of itself, conforms to standard and routinized practices,⁶ whereas experiments are, by definition, innovative and require counterfactual thinking (Camuffo et al., 2020). This delineation between the two modes of learning described above is also present in the practitioner literature (Bhidé, 2000; Blank, 2013; Ries, 2011). I've been in the software business for a long time. I've been in startups and big companies, and worked with angels and VCs. But I have no idea what any of this means! What is the market for a paper like this? And why can't it be written in plain English?
- fergie 5y agoIt is written like an undergraduate essay, which is what it seems to be. Judging by the responses it seems like most people haven't actually read it beyond the title.
- wavesplash 5y agoIf it helps, skip to section 6 for the conclusions (spoiler: Angels are). The section you've quoted is academic signaling (in 'entrepreneurship research') to context and differentiate this paper from other research and entrepreneurship books/papers. And yes, I strongly agree with you: perhaps someday academia will embrace plain English and real hyperlinks.
- jkhdigital 5y agoAnd, in the fields which make heavy use of mathematical abstractions, “open-source” proofs written in a language amenable to automated proof assistants.
- dublin 5y agoHell, yes. Next question? (FWIW, I have started and been part of the founding team for several companies, both angel and VC-backed. VCs are not nearly as interested in innovation or building a good company as they are in establishing control to set up a successful exit. That's not necessarily bad, it's just that they're more mercenary by nature. Many more angels are willing to put up with early losses to develop the tech/company, then the VCs come in to fund growth and they get washed out after taking the lion's share of the risk. Sad, but true.)
- nautilus12 5y agoJust thinking about it logically and you can see that it is. An angel has put signifigant personal investment into a project, they want to see it succeed both for themselves and for the entrepreneur according to their vision. In that sense it is a partnership. With VC's increasingly today its possible that the investment in the business is some type of metastrategy for their portfolio so they may not care if one particular business succeeds or fails.
- stephc_int13 5y agoContrary to common belief, the main job of VCs is not to fuel innovation, it is to protect the money of their clients from the potential disruption. Angels, on the other hand, are more likely to have a wider range of internal motivations and less constraints. Some of them might be open to real innovation instead of hedging against it.
- dehrmann 5y agoMy take is they sell a product to pension fund managers who need to invest in sophisticated asset classes to justify their jobs.
- stephc_int13 5y agoYes, and also they manage to kill the companies who refuse to play the game. VCs are not the friends of innovation.
- mbesto 5y ago> the main job of VCs is not to fuel innovation, it is to protect the money of their clients from the potential disruption. Huh? VCs clients are pension funds, fund of funds, etc. Their main job is to return those LPs a return on investment. Nothing more. Very few of those LPs have deliberate plans to avoid disruption. Unless you're talking about CVC specifically. Unless I'm mistaken about your use the word "client", this is just plain wrong.
- stephc_int13 5y agoI don't see how this is wrong. Making a return is protecting money, and in this case this is done by hedging against innovation.
- bvoq 5y agoYea but they tend to maximise profit. I was invited to join a swiss VC group and the way they do it is you don't get to have an idea. You do market analysis and form groups during 1 year of the scholarship and then build the product with a pyramid scheme return. If you have your own idea it's believed that you love the idea a little too much unfortunately.
- vc-doggie 5y agoVC here. The comments made about VCs being stewards of other peoples money, and therefore having a different risk tolerance are completely true. There needs to be some solid POC or a well known and trusted team or it is a no-go. But it is not about VCs being dumb finance guys -- some of us are very technical, myself I was a repeat founder and have an advanced technical degree. We invest more money in each deal than angels might in their entire lifetime, and actively help run and scale a company. I certainly have a lot of respect for non-shotgun angel investors, but one is a hobby, and one is a career!
- haecceity 5y agohow many VCs can fit on the head of a pin?
- coldtea 5y agoIn some countries, it's actual (theological) angels that are more likely to occur than the other too, as there are neither VCs not angel investors.