The Future of Venture Capital - Of Startups, Seed Funds, and Limited Partners

The annual PreMoney conference in June 2014 was themed ‘the future of venture capital’. One topic of discussion was the proliferation of angel investments and seed funds.

1. How to find the right match between startups and angel investors?
2. How do angel investors decide where to invest?
3. How should Limited Partners decide which seed funds to invest in?

Investors and startups should fall in love.  Elad Gil looked at the two sides of the angel investor - startup relationship. For a startup to fall in love with an angel investor, an angel can do several things to help the entrepreneur: making introductions to the network and providing access to privileged information, offering support like CEO dinners, and being available and discrete.

Investing requires to be principled. Elad suggest the most important criterion for angels to invest in a startup should be the market - as Andy Rachleff said, the market always wins, and the only way to make money is to be contrarian and right. Companies such as eBay and AirBnB were initially considered overvalued and are in fact perfect examples of those criteria. Jeff Clavier from Softtech VC added his key criteria for investing

• Do I like the founders? Are they a good fit for the category? Do the founders know what they don’t know?
• Am I passionate about the product? Do I love this deal? Every new piece of information in the course of due diligence should make you more excited.
• Is it fundable in 12-18 months?

He strongly suggested to invest if the founders are legit and the referrer is respectable. He also advocated building a strong investor syndicate to help fix the founders shortcomings, and to avoid the party rounds where no one is responsible.

Elad also offered suggestions how to avoid the trap of becoming a bad angel: re-inventing yourself, building networks and knowledge for your company, and focusing on things you can uniquely help with.

Network centrality and follow-ons distinguish seed funds. Limited Partners get inundated with pitches from 50+ new seed funds which have been created in the past years. The Limited Partner community cares about these MicroVCs, but needs help to understand which funds have deal flow and syndication. Jeff Clavier pointed out the importance of having a ‘shtick’ - a differentiated strategy by geography, sector, infrastructure, ecosystem, value add - to  distinguish from the hundreds of other MicroVCs. Anand Sanwal from CB Insights provided quantitative insight on the relative attractiveness of the funds and general partners

• Network centrality: Google PageRank for investors, and to high quality investors. Three of the top six leaders here are also members of Y Combinator: Alexis Ohanian, Max Levchin, Gary Tan, Marc Benioff, David Tisch, Paul Buchheit.
• Syndication and follow-on investments: Who invests afterwards provides more confidence. Follow on rates are highest for seasoned investors and entrepreneurs such Bobby Yardani, Larry Augustin, Matt Coffin, Gil Penchina. As an aside, CB insight found that VC involvement in seed rounds creates more follow-on funding.

None of the funds have a track record yet, and similarly, neither do many of the fund’s general partners. But the analysis promises to be an indicator of future success.