In areas like cleantech, materials, semiconductors, storage, and telecom, you can’t prove anything on a half-million investment. You’re quite limited to a certain kind of company to begin with. The other problem I see is, I’m puzzled by the way some super angels are marketing against VCs. They’re saying it’s an advantage, as a source of capital, not to have much capital. I think this is silly.
It’s an advantage to start low. But sooner or later, if you are trying to create a meaningful, change-the-world company, you will have to have capital. Look at Facebook, Twitter, YouTube. They needed hundreds of millions of dollars to do their big vision, and to change the world. To say, “I’ll only participate in your seed round, but not Series A, B, C,” I think for the most part, this is bad news for the entrepreneur.
X: So how should entrepreneurs be thinking about this?
IA: The notion of a lean startup—I don’t think first-time entrepreneurs fully understand that. They think on 50,000 to half a million dollars, they’ll be able to build a company. Viral marketing, the cloud as an infrastructure, cheap developers in Romania—they let you get to market on low capital. But let’s not confuse getting to market with building a company. Say you build something on $50K. Now what? If you’re starting to be successful, you’ll have to raise several million.
“Lean startup” refers to getting from an idea to product/market fit. But product/market fit is not an exit. You haven’t changed the world. Maybe Google bought [your company], or Facebook bought it. But lean startup is a start, not the end of it. This is where many young entrepreneurs confuse the true capital needs of a lean startup. And the misunderstanding of what “lean startup” means is very integral to the marketing of micro-VC funds.
X: Will micro VCs just become regular VCs if the exit market comes back?
IA: I think the smart angel funds, or micro VCs, will absolutely learn that in order to make money on their investments, they need to have reserves and participate in later rounds. So in that sense they’re no different from VCs.
But it’s a positive phenomenon. Many VCs can offer the same services. Charles River Ventures has always had a seed program, some of our very best investments have started as seed, and we have had a more formal program called QuickStart since 2006. We are very active in the seed market. But from an entrepreneur perspective, having your funding partner have enough capital is an advantage, not a disadvantage. It’s a resource you can use smartly.
