VCs know your gonna blow their money…

In Angel / VC on December 8, 2010 at 10:07 pm

I am following an interesting trend. Venture capitalists know that they historically invest more money in deals than may be required for success. In large part, VCs fall in this trap because they need to put so much capital to work per deal to collect management fees or risk returning committed capital.

It’s hard to make sweeping generalizations about the venture capital community, but at the risk of doing so, most VCs are in the business of raising capital themselves and deploying it so they can collect management fees. Therefore, VC firms have a motivation to raise larger sums of money for their funds and to deploy large pieces of capital because it all takes the same amount of work as smaller sums of capital. Since they get paid a % based on assets deployed, big numbers motivates them.

That being said, I have read and heard first-hand that many venture capitalists recognize and will admit that their incentives are not necessarily aligned with proper deal structures. That’s not a softball statement for VC hawks that proclaim, “no kidding, their vulture capitalists…”.

I am highlighting this insight because I believe there is a strong trend in super angel funds and more pragmatic approaches to achieving business goals for the a) investors and b) the funded. Case in point, do a search on VC and angel investing on YouTube and you will find several videos where VCs and angel investors make statements to the tone of the best deals where started out early with little capital, like Google and Facebook.

My advice if you get VC money: TAKE it and HOARD it. Don’t buy junk with your logo on it or other items that don’t fast track you to commercialization… Go execute and act is if you have lint in your pocket. Your financial backers will be quite impressed, as a matter of fact, they may just submit a HBR article about the experience because you will have been a “black swan” in their world.  You will get investor support for a longtime when you have demonstrated prudence with investor’s capital. So, keep an eye out for VCs getting more active in early-stage investing and the emergence of super angel funds and let me know what you are seeing.


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