I just finished reading a recent guest article on VentureBeat titled, “Why AngelList Will Become The Android of Venture Capital” written by Gaurav Jain. Unfortunately, while it may make good fodder for those entrepreneurs who have a love/hate relationship with the traditional venture capital community, I disagree that AngelList will replace more traditional venture capital any time soon, if ever.
The fundamental reason I believe this is that the majority of good companies still take many millions of dollars before they get to a point where they are de-risked enough where other sources of capital are willing to invest. Banks won’t do it. Private Equity won’t do it. Limited Partners won’t do it. Angels — even those with deep pockets — would have a hard time writing checks for $5M+ without wanting some kind of control over the company.
The exception to this is obviously consumer internet companies. But, not all venture investments are in consumer internet companies. What about B2B software, healthcare (biotech, medical devices), hardware? These are relatively capital intensive businesses that can drive significant returns — look at recent high growth public B2B SaaS multiples for companies such as Workday and CornerstoneOnDemand.
I haven’t done any checking for a while but the last time I did, it took somewhere around $50M to get the median SaaS company to an IPO. Heck, Marketo – an InterWest investment – took in $50M before you could argue it had “derisked” its business — and, as we learned later, some investment banks didn’t buy at the IPO because they wanted to see a faster route to profitability. In other words, the company was still too risky for them.
Maybe I’m wrong, but I doubt there are many members of AngelList who would be willing and/or able to write multi-million $$ checks — a syndicate of 1000 angels each putting in $50K seems like a nightmare scenario. Can you imagine trying to get a majority to agree to a change in the voting rights agreement? Yikes.
But, I do get what Gaurav is saying — Deals aren’t done on the golf course, in the clubhouse or the country club anymore — the theoretical haunts of the traditional venture community. We “dinosaur” VCs better augment our deal flow tactics. We better try some different techniques of engagement with entrepreneurs. And, we better up our game in terms of making ourselves accessible via social networks, etc.
But, I believe there will continue to be a place for more traditional venture investing/ors. It may come in a different form factor such as the one Andreesen-Horowitz has set up and it may require different ways of attracting the best entrepreneurs but it will still involve making relatively large bets on relatively early stage and risky companies.
Just one man’s opinion. What do you think?