Right before the July 4th holiday, Dave McClure and 500 Startups put on their second annual “Pre-Money Conference.” I was lucky to attend as part of my work with the folks at Bullpen Capital, and it was a great conference and day of running into old friends and making new ones. I finally have a chance to jot down my notes from the event, so here goes, in no particular order — and, while entrepreneurs and founders won’t think about these issues on a day-to-day basis, I do believe it’s worthwhile to be somewhat aware of the world in which technology investors live in, because when one starts to peel back the layers, it quickly becomes apparent much of the propaganda shared online and on Twitter about investors is often off the mark. This isn’t meant to imply any of this is bad — it’s just reality, a reality founders may find useful to keep as context as they’re thinking about or actually raising that next round of funding:
A Select Few Raise Quickly, The Rest Are Always Raising: Having worked in a variety of early-stage startups and having helped many folks raise funds, I myself am continually surprised to learn how much time professional investors spend raising dollars for their investment funds from LPs. The bigger funds we all know by name — they raise money quickly. The rest of them have to constantly readjust to the market, think about the composition of general partners, and many have had to withstand haircuts from the billion-dollar club to more modest levels of assets under management. For an entrepreneur, this means most of the investors they’re courting or pitching are likely to be switching context between finding new LPs and evaluating new potential investments. It’s not an excuse, but it may be part of the reason why many are slow to respond to email (or don’t respond at all), and always seem to be in a rush.
In The Short-Term, Investors Are Much More Accountable To Their Own Investors: There’s a lot of good chatter online and on Twitter about behavior among investors, and that investing teams need to be more diverse (on many dimensions). There’s also no shortage of blogging and tweeting by investors marketing themselves as the best choice for founders. What we see online often doesn’t translate offline in real life, but by now, we shouldn’t be surprised by that. Again, for the majority of investors, while their job is to give capital to founders, they’re held much more accountable to their own investors. It makes sense when you think about it, but I’m not so sure most founders (who, likely, don’t care about this world) realize that, depending on the moment, they are not the immediate priority — no matter what all the blogs say.
Up And Down The Stack, It’s A Noisy Market For Capital: Ask anyone who has been investing for a while and is at least good (or great) at it, and they’ll say a version of the same thing — they’re not resting on their laurels. It is a brutally competitive market to invest dollars into private companies, and seed-stage firms which like to lead rounds as well as traditionally growth-stage investors are feeling the heat from all sorts of angles. As a result, investors are resorting to all sorts of branding tactics (PR, for example) and operational techniques (scouting, for instance) to get their names in front of the best opportunities. In a noisy market, attention is the scarcest resource, and because attention is a function of time, it can (somewhat) be purchased with money. Somewhat.
Successful Angel Investors Are Seen As Rock Stars: With public markets tightening and high-growth companies staying private longer, there’s tremendous pressure worldwide for those holding high beta-seeking capital to pump it into early-stage technology. This trickles down from the top, all the way to the long-time angel investors, who are now seen as being ahead of the curve, and rightfully so. It’s hard to prove it, but it just feels like more people are getting more serious about trying to invest small amounts of capital in very early-stage ventures. They come to a conference like this, in part, to better understand what method might work best — whether to raise an actual fund, or to just be an angel, or to try to be an LP, or to use a platform and run syndicates or trade using data. It’s easy to monitor this uptick in activity and conclude it’s a frothy time — yes, it is, but there’s also less of a game for these investors to play in the public markets, so they spillover into another section of the casino.
Seed “Rounds” Are In The Past, Now Things Roll To A Close: I’ve mentioned this to founders often lately…even just a few years ago, the founder would open a process to raise a seed round, and it would close within a finite period of time. No more. While it happens on occasion, the majority of founders are collecting checks at different valuation caps over a longer period of time, holding off on converting the caps to priced rounds until they find a lead investor. What this means is founders have had to collect smaller checks along the way, continuing to build their businesses, and keep momentum moving with the hope of convincing someone to lead and/or price the round and convert. There are some advantages and disadvantages of the new world, but on the whole, I believe it’s better for founders net-net as they don’t have to price their round too early — the cost is that it’s harder to find leads who hold the proper incentives to ensure the early-stage venture is on the right track for downstream investing.
It’s Not A Bubble, But That Doesn’t Mean Some People Won’t Get Burned: Have you noticed some people have been talking about a “bubble” since 2009? That’s because the time in which we’re living in is, for all intents and purposes, quite crazy — the proliferation of technology both to the mainstream (in the form of mobile phones and Facebook and social mobile apps) as well as those reinventing industries like transportation, food, and retail has not only shifted market value from incumbents to new entrants, it’s also increased the overall size of the market. When you look at the data — the amount of money spent in venture capital by quarter, or the number of IPOs, or even just the tightening of the IPO window of late — it’s clear that some big private companies are way overvalued, but it’s also clear that any shrapnel from any fallout won’t affect a wide swath of people. In Oliver Stone’s “Wall Street,” Gordon Gecko mocked a fellow investor who kept predicting doom by retorting: “Like a rooster who takes credit for the dawn.”