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The first sign that something is wrong is when the Fund and its Founders/Partners are a lot more visible and noteworthy than any of their portfolio companies.
The second sign is when media shills talk about the abundant “value” of these Angel Funds because they can introduce you to folks. From a March 16th article by Michael Arrington in TechCruch about Y Combinator – “Y Combinator startups get a big head start in the competitive tech world. The founders, often just out of school (or still in school), get enough money to pay the bills for a few months as they work on their projects. They also get mentoring and polish from the Y Combinator team and a chance to present to prominent angel investors and venture capitalists at twice-yearly demo days”.
I have a problem with Arrington’s use of : “big head start”; mentoring and polish from the Y Combinator team”; and “chance to present to prominent Angels”
The third sign is when the 2 or 3 or 4 or 5 guys in the Angel Fund say that they will provide true mentoring to the 50 – 60 – 70 lunch money investments they have in their portfolio.
The fourth sign is the level of fixed % of the company taken for this lunch money. The fact that there is a fixed percentage assigned during this lunch money stage is wrong to begin with. The lunch money investment should somehow be tied to the value of the Series A (with a snappy discount & accrued interest).
The fifth sign is when old line VC firms throw some money at these Angel Funds (Sequoia / Y Combinator and Spark / TechStars) and then have the Angel Funds scour a geographic region (Silicon Valley, Boston, New York) for portfolio companies.
What is needed is a Public-Private For Profit dedicated effort to work with, support and compensate the Seed Infrastructure (Incubators, Economic Development Agencies, Tech Transfers). The "public" component is the existing Seed Infrastructure. The "private" component is the for-profit START Fund.
This infrastructure already exists and provides the efficient sourcing, screening and post-investment oversight needed to develop Series A worthy companies. What is needed is a dedicated effort that is not geographically constrained. What is needed is a thorough Virtual Incubation system that brings both Community and Collaboration to all elements of the total Investing community.
By dedicating a private/public collaboration to increasing the value and viability of early stage companies you are also increasing their valuation for their Series A round; thereby leveling the playing field with what will be a smaller group of Traditional VC funds.
Please review - http://www.slideshare.net/ElliottDahan/start-fu...
Elliott Dahan
elliott(a)thegrowthgroup.com
Elliott Dahan
Your comments are insightful, and I think public/private partnerships can be great, but we don't have one of those in Austin, Texas and your points don't really relate to Capital Factory.
Sign #1 is off the mark because we don't have any portfolio companies yet, it's our first year. When we do have successes, I'm pretty sure we will promote them loudly. Regarding Sign #3, we will have 3 companies in our first year, not 50-70. Sign #4 assumes we desire some sort of venture-level Series A, which is a bad assumption. We don't have any VC money, so Sign #5 isn't really relevant either.
While I philosophically agree with the challenges of early stage programs that you pointed out, none of them seem to relate to Capital Factory. It seems like you had a rant stored in your copy buffer that you were ready to paste, and needed a convenient spot.
The venture model is broken, $500K is definitely the new $5M, and none of this is news to anybody. The early stage funding models are trying to fill a void to support entrepreneurship, which drives our economy. The only certainty is that even this will change and evolve.
My Sign #1 and Sign #3 refer more to Y Combinator. But, as any Angel Incubator grows, I am sure that Angel Incubator will add more portfolio companies.
Sign #4 - Venture level Series A - I am assuming that $10K-$15K-$20K . . . . will not take a seed company to profitability. I could very easily be wrong when talking about iphone apps and other Web 2.0 type products. Therefore, companies will need to raise an A round or M&A or take corporate investment down the road.
Your comment - "While I philosophically agree with the challenges of early stage programs that you pointed out, none of them seem to relate to Capital Factory. It seems like you had a rant stored in your copy buffer that you were ready to paste, and needed a convenient spot." . . . kind of a shame - just when you were responding with measured and civil comments.
BTW - The Austin area does have several excellent incubators (ATI & Clean Energy). Joel Serface was the Director of the Austin Clean Incubator before being recruited by Kleiner, Perkins to be a VC in their CleanEnergy practice.
Elliott
I was just at the ATI today, strangely enough. I consider them to be a little different since they don't grant small amounts to early stage companies, and their commitment to their companies is more open-ended.
The ATI folks are seeing the changing landscape as well, and trying to adapt quickly. They currently sublease space to an incubator inside the incubator (named Tech Ranch). How crazy is that? Sometimes you just have to try things out and see where it leads.
We see the ATI (or Tech Ranch) as a potential next step for companies after the Capital Factory program. While we work closely with them, I don't see them exactly fitting the type of public/private partnership you describe. But who knows what the future will hold.
$20K will probably not take most companies to profitability, but a $100K - $250K angel round might, and I wouldn't consider that a traditional A round.
Like most things these days, I don't think we'll ever "get it right" but will constantly iterate, just like we preach to our entrepreneurs.
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