The Unbundling of the Venture Capital Industry

People often mock Super-Angels as being impure because they invest other people’s money. We also often get asked “What are VCs and Seed Funds doing on AngelList?” (They’re clearly marked, by the way, and you can choose who your pitch is visible to.)

I will propose, however, that whose money you’re investing is less relevant than on what terms it comes on. Venture Hacks was created to educate entrepreneurs when the Angel market was much less robust. At the time, if you wanted anything more than $250K, you basically had to go to Venture Capital.

Venture Capital, at the time, was a bundle of three things – Advice, Control, and Money.

The money is obvious – you want money, you go get it. But in the case of VC, it came with control – because the amounts being disbursed were large enough, it made sense that they needed to be actively managed. And finally, because it was actively managed, you cared about how well it was managed, and thus the advice.

Now, thanks to increased dissemination of information on the web, Venture Hacks and many others (Series Seed, A VC, Feld Thoughts, The Funded, etc.) have helped entrepreneurs understand the control layer. Y Combinator and other seed incubators have essentially helped “union-ize” the startup workforce, and via reputation and standardized documents, reduce the control that VCs have over startups. Lower capital requirements have opened up the playing field of investors, and reduced the need or even the ability of early-stage investors to do active portfolio management.

So Angels are investors who leave out the control. They essentially bundle just Advice and Money.

The amount of money invested and whose money it is are factors that play into it, but most Super-Angels eschew control. Similarly, some seed funds (i.e., True Ventures), and some larger funds (i.e., Andreessen-Horowitz) make entrepreneur-friendliness a core part of their ethos, and as such often leave out classic control provisions (M&A vetos) or mechanisms (Board seats). Conversely, you’ll see some Super-Angels or even traditional angels asking for more control if they’re investing a significant portion of their investable capital.

We are also seeing the emergence of Seed Combinators and Pure Money plays. Y Combinator, TechStars, I/O Ventures, AngelPad, Founder Institute, etc., are basically giving advice – if you’re going there for the funding, then you’re not doing the math. DST and later stage funds are pure sources of money.

The net effect is that the Venture Capital is slowly being un-bundled, as mature industries often are.

One side effect of all of this is that reputation matters a lot less. It used to be that VC reputation was built on their ability to pick winners (this has signaling value to other investors and potential employees), the advice that they gave, and how friendly they were to the entrepreneurs, given that they essentially had Board control. Most of this doesn’t matter anymore – it’s only the signaling and advice that carries much value for savvy entrepreneurs, and even the advice part is gradually being augmented and possibly replaced.

There is one thing that the new unbundled model can’t replace – which is the subtle influence of incentives. You may be able to get advice from the best advisors, money from the cheapest source, and keep control for yourself, but the one thing that an experienced VC partner can uniquely provide you is someone who has a strong incentive (because they own a lot of your company), and a very different perspective and experience base. That’s the old-fashioned “Investor as a Partner” model. It will always survive, to some extent, but it’s not the model that any but the best firms practice.