VCs Offer Terms Most Angels Can't Match In Pulse Funding | Hacker News Reader

VCs Offer Terms Most Angels Can't Match In Pulse Funding

techcrunch.com

So, this article identifies broad classes of actors ("VCs", "angels", etc) and attributes motivations and patterns to them.

However. there are very big differences in behavior in sub-classes inside these groups. Top-tier VCs, low-tier angels, etc. The types of deals that these groups are willing to engage in differ radically, especially due to the ecosystem and the structure. This stuff isn't particularly apparent until you spend a great deal of time understanding the structure of the marketplace...

You're absolutely right Josh, really important distinction.

Wow. Fred Wilson has written before about seed investment as a way to buy rights to a bigger deal downstream, but treating it as a loss leader never crossed my mind. Makes perfect sense for them, since a deal that won't raise bigger money later on is probably not one of their home runs anyways.

Note how they had multiple VC firms to mitigate signalling risk if one or more decline to invest in a priced Series A round.

I posted this on my blog and to my batch mates but I wonder what HNers think:

I think this investment brings up an interesting point. Angels often portray themselves as being more entrepreneur-friendly with deal terms and often they are.

But VCs care about being the first institutional money and getting more than 20% (usually higher). Aside from that they care about getting people to that point. As a result a VC could care less about the terms of a seed convertible note so long as it converts (which everyone cares about). Many VCs will want the follow-on option but that is not always the case as with Pulse/Alphonso Labs.

Angels cannot really compete with those terms as they will not usually be setting terms at the next level and make a lot of their money off caps and discount rates.

Just something to think about.

This requires VC's to spend partner time managing many more portfolio companies which dramatically changes their business model. It also means that they have to get better at judging "younger companies" than they would normally invest in, otherwise why not offer a "real A round" and be done with it?

It doesn't mean that they cannot change their model but I would like to read about a few more deals like this before I would take this as a harbinger of a new VC model.

The Right Side Capital folks announced several months ago that they would pursue a model like this (see http://www.rightsidecapital.com/ ) but they have yet to announce their first investment.

Sequoia has made tens of deals as have other firms such as Accel, CRV and more. They don't publicize these deals because they don't think it is in the best interest of the companies or themselves but they happen as Dave McClure and Roloef Botha alluded to on stage at TC Disrupt.

Three days ago, the Sequoia Capital branch in TelAviv (Israel) have announced explicitly that they wish to compete with angels and would provide a pre-seed and seed funding up to $500K for startups.

(Sorry guys, I currently have it in hebrew only, http://www.themarker.com/tmc/article.jhtml?ElementId=skira20...)

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